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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 0-23977
DUKE CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Delaware 51-0282142
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
526 South Church Street, Charlotte, North Carolina 28202-1904
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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704-594-6200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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7 3/8% Quarterly Income Preferred Securities issued by Duke Capital
Financing Trust I and guaranteed by Duke Capital Corporation New York Stock Exchange, Inc.
7 3/8% Trust Originated Preferred Securities issued by Duke Capital
Financing Trust II and guaranteed by Duke Capital Corporation New York Stock Exchange, Inc.
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF CLASS
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Common Stock, without par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
(I)(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE
REDUCED DISCLOSURE FORMAT. ITEMS 4, 10, 11, 12 AND 13 HAVE BEEN OMITTED IN
ACCORDANCE WITH INSTRUCTION I(2)(C).
All of the Registrant's common shares are directly owned by Duke Energy
Corporation (File No. 1-4928), which files reports and proxy material pursuant
to the Securities Exchange Act of 1934, as amended.
Estimated aggregate market value of the voting stock held by nonaffiliates of
the registrant at February 26, 1999........................................None
Number of shares of Common Stock, without par value, outstanding at
February 26, 1999.........................................................1,010
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DUKE CAPITAL CORPORATION
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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ITEM PAGE
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PART I.
1. Business .......................................................................... 1
General .......................................................................... 1
Natural Gas Transmission ......................................................... 2
Field Services ................................................................... 5
Trading and Marketing ............................................................ 7
Global Asset Development ......................................................... 8
Other Energy Services ............................................................ 10
Real Estate Operations ........................................................... 10
Environmental Matters ............................................................ 10
Foreign Operations and Export Sales .............................................. 11
Employees and Management ......................................................... 11
Operating Statistics ............................................................. 12
2. Properties ....................................................................... 12
3. Legal Proceedings ................................................................ 13
PART II.
5. Market for Registrant's Common Equity and Related Stockholder Matters ............ 14
6. Selected Financial Data .......................................................... 14
7. Management's Discussion and Analysis of Results of Operations and Financial
Condition ........................................................................ 14
7A. Quantitative and Qualitative Disclosures About Market Risk ....................... 25
8. Financial Statements and Supplementary Data ...................................... 26
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ....................................................................... 54
PART IV.
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................. 54
Signatures ....................................................................... 56
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
From time to time, the Company may make statements regarding its assumptions,
projections, expectations, intentions or beliefs about future events. These
statements are intended as "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. The Company cautions that
assumptions, projections, expectations, intentions or beliefs about future
events may and often do vary from actual results, and the differences between
assumptions, projections, expectations, intentions or beliefs and actual
results can be material. Accordingly, there can be no assurance that the actual
results will not differ materially from those expressed or implied by the
forward-looking statements. For a discussion of some factors that could cause
actual achievements and events to differ materially from those expressed or
implied in such forward-looking statements, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition, Current
Issues--Forward-Looking Statements."
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PART I.
ITEM 1. BUSINESS.
GENERAL
Duke Capital Corporation (collectively with its subsidiaries, the
"Company") is a wholly owned subsidiary of Duke Energy Corporation (Duke
Energy) and serves as the parent for certain of Duke Energy's non-utility and
other operations. The Company provides financing and credit enhancement
services for its subsidiaries and conducts its operations through six business
segments:
o Natural Gas Transmission
o Field Services
o Trading and Marketing
o Global Asset Development
o Other Energy Services
o Real Estate Operations
These segments were defined as a result of the Company adopting Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
Natural Gas Transmission, through its Northeast Pipelines, provides
interstate transportation and storage of natural gas for customers primarily in
the Mid-Atlantic and New England states. Until the expected sale of the Midwest
Pipelines in early 1999, Natural Gas Transmission also provides interstate
transportation and storage services in the Midwest states. See further
discussion of the proposed sale of the Midwest Pipelines in Note 11 to the
Consolidated Financial Statements, "Commitments and Contingencies." The
interstate natural gas transmission and storage operations are subject to the
rules and regulations of the Federal Energy Regulatory Commission (FERC).
Field Services gathers, processes, transports and markets natural gas and
produces and markets natural gas liquids (NGL). Field Services operates
gathering systems in ten states that serve major gas-producing regions in the
Rocky Mountain, Permian Basin, Mid-Continent and Gulf Coast areas.
Trading and Marketing markets natural gas, electricity and other
energy-related products across North America. The Company owns a 60% interest
in Trading and Marketing's operations, with Mobil Corporation owning a 40%
minority interest.
Global Asset Development develops, owns and operates energy-related
facilities worldwide. Global Asset Development conducts its operations
primarily through Duke Energy Power Services, LLC (Duke Energy Power Services)
and Duke Energy International, LLC (Duke Energy International).
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through Duke Engineering &
Services, Inc. (Duke Engineering & Services), Duke/Fluor Daniel and
DukeSolutions, Inc. (DukeSolutions).
Real Estate Operations conducts its business through Crescent Resources,
Inc., which develops high quality commercial and residential real estate
projects and manages forest holdings in the southeastern United States.
On June 18, 1997, Duke Energy completed a stock-for-stock merger with
PanEnergy Corp (PanEnergy). Subsequently Duke Energy contributed the common
stock of PanEnergy to the Company. The combination of the Company and PanEnergy
was accounted for similar to a pooling of interests; therefore, the
Consolidated Financial Statements and other financial information included in
this annual report for periods prior to the combination include the combined
historical financial results of the Company and PanEnergy. (See Note 2 to the
Consolidated Financial Statements, "Business Combinations.")
Certain terms used to describe the Company's business are explained below.
BRITISH THERMAL UNIT (BTU). A standard unit for measuring thermal energy or
heat commonly used as a gauge for the energy content of natural gas and other
fuels.
BROWNFIELD DEVELOPMENT. The development of a new power generating facility on a
site with existing industrial assets, typically power generating assets.
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COGENERATION FACILITY. A facility that produces electric energy and useful
thermal energy for industrial, commercial, heating or cooling purposes.
COMBINED CYCLE. The combination of one or more gas turbines and steam turbines
in an electric generation plant. An electric generating technology in which
electricity is produced from otherwise lost waste heat exiting from one or more
gas turbines.
CUBIC FOOT (CF). The most common unit of measurement of gas volume; the amount
of natural gas required to fill a volume of one cubic foot under stated
conditions of temperature, pressure and water vapor.
FEDERAL ENERGY REGULATORY COMMISSION (FERC). The agency that regulates the
transportation of electricity and natural gas in interstate commerce and
authorizes the buying and selling of energy commodities at market-based rates.
GATHERING SYSTEM. Pipeline, processing and related facilities that access
production and other sources of natural gas supplies for delivery to mainline
transmission systems.
GENERATION. The process of transforming other forms of energy, such as nuclear
or fossil fuels, into electricity. Also, the amount of electric energy
produced, expressed in megawatt-hours.
GREENFIELD DEVELOPMENT. The development of a new power generating facility.
INDEPENDENT SYSTEM OPERATOR (ISO). Ensures non-discriminatory access to a
regional transmission system, providing all customers access to the power
exchange and clearing all bilateral contract requests for use of the electric
transmission system. Also responsible for maintaining bulk electric system
reliability.
JURISDICTIONAL. Facilities and activities subject to the primary regulatory
oversight of FERC or state regulatory agencies.
LIQUEFIED NATURAL GAS (LNG). Natural gas that has been converted to a liquid by
cooling it to -260 degrees Fahrenheit.
MERCHANT PLANT. A power plant that sells directly to wholesale customers
without its output necessarily being committed to long-term power sales
agreements.
NATURAL GAS. A naturally occurring mixture of hydrocarbon and non-hydrocarbon
gases found in porous geological formations beneath the earth's surface, often
in association with petroleum. The principal constituent is methane.
NATURAL GAS LIQUIDS (NGLS). Liquid hydrocarbons extracted during the processing
of natural gas. Principal commercial NGLs include butanes, propane, natural
gasoline and ethane.
NATURAL GAS/POWER MARKETER. An entity which buys and sells a commodity or
commodities at either fixed or index prices. More sophisticated
trader/marketing entities also provide comprehensive energy management
services, such as capacity, supply, storage and price risk management.
THROUGHPUT. The amount of natural gas transported through a pipeline system.
TRANSMISSION SYSTEM (NATURAL GAS). An interconnected group of natural gas
pipelines and associated facilities for transporting natural gas in bulk
between points of supply and delivery points to industrial customers, local
distribution companies, or for delivery to other natural gas transmission
systems.
A discussion of the current business and operations of each of the
Company's segments follows. The Northeast Pipelines are an essential part of
Natural Gas Transmission's strategy to advance projects that provide expanded
services to meet the specific needs of customers. The proposed sale of the
Midwest Pipelines allows Natural Gas Transmission to focus on regions, such as
the northeastern U.S., with increasing demand for gas. The Company plans to
significantly grow several of its other business segments: Field Services,
Trading and Marketing, Global Asset Development and Other Energy Services. For
further discussion of the operating outlook of the Company and its segments,
see "Management's Discussion and Analysis of Results of Operations and
Financial Condition, Current Issues -- Operations Outlook." For financial
information concerning the Company's business segments, see Note 3 to the
Consolidated Financial Statements, "Business Segments."
The Company is a Delaware corporation with its principal executive offices
located at 526 South Church Street, Charlotte, NC 28202-1904. The telephone
number is 704-594-6200.
NATURAL GAS TRANSMISSION
Natural Gas Transmission consists of the Northeast Pipelines, which
includes Texas Eastern Transmission Corporation (TETCO) and Algonquin Gas
Transmission Company (Algonquin), and the Midwest Pipelines, which includes
Panhandle
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Eastern Pipe Line Company (PEPL) and Trunkline Gas Company (Trunkline). PEPL
and Trunkline, along with additional storage related to those systems, are
expected to be sold to CMS Energy Corporation in early 1999. See further
discussion of the sale in "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Liquidity and Capital Resources."
For 1998, consolidated natural gas deliveries by Natural Gas
Transmission's interstate pipelines totaled 2,593 TBtu (Trillion British
thermal units), compared to 2,862 TBtu in 1997, which represented approximately
12% of the natural gas consumed in the United States. The Northeast Pipelines
and the Midwest Pipelines natural gas deliveries were 1,459 TBtu and 1,141
TBtu, respectively, in 1998, with 7 TBtu of intercompany transportation. A
substantial majority of the delivered volumes of Natural Gas Transmission's
interstate pipelines represents gas transported under long-term firm service
agreements with local distribution company (LDC) customers in the pipelines'
market areas. Firm transportation services are also provided under contract to
gas marketers, producers, other pipelines, electric power generators and a
variety of end-users. In addition, the pipelines provide both firm and
interruptible transportation to customers on a short-term or seasonal basis.
See natural gas deliveries statistics under "Business, Operating Statistics."
Demand for gas transmission of Natural Gas Transmission's interstate pipeline
systems is seasonal, with the highest throughput occurring during the colder
periods in the first and fourth quarters.
In 1998, Natural Gas Transmission's fully interconnected interstate
pipeline system consisted of approximately 20,700 miles and received natural
gas from most major North American producing regions for delivery to markets
throughout the Northeast and Midwest states. The proposed sale of the Midwest
Pipelines would result in a reduction of approximately 10,400 miles in the
Company's interstate pipeline systems.
[MAP OF UNITED STATES ILLUSTRATING NATURAL GAS TRANSMISSION'S INTERSTATE
PIPELINES AND STORAGE AREAS.]
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NORTHEAST PIPELINES
TETCO's major customers are located in Pennsylvania, New Jersey and New
York, and include LDCs serving the Pittsburgh, Philadelphia, Newark and New
York City metropolitan areas. Algonquin's major customers include LDCs and
electric power generators located in the Boston, Hartford, New Haven,
Providence and Cape Cod areas.
TETCO also provides firm and interruptible open-access storage services.
Storage is offered as a stand-alone unbundled service or as part of a no-notice
bundled service. TETCO's storage services utilize two joint venture storage
facilities in Pennsylvania and one wholly owned and operated storage field in
Maryland. TETCO also leases storage capacity. TETCO's certificated working
capacity in these three fields is 70 Billion cubic feet (Bcf), and the combined
working gas in storage was 61 Bcf on December 31, 1998. Algonquin owns no
storage fields.
Investments include a 37.5% ownership interest in Maritimes & Northeast
Pipeline and a 9.8% ownership interest in Alliance Pipeline. Maritimes &
Northeast pipelines is expected to be completed in late 1999 and will deliver
natural gas to markets in the Canadian Maritimes provinces and the northeastern
United States from a supply basin offshore Nova Scotia. The 1,900 mile Alliance
Pipeline project will deliver Canadian gas from Fort St. John, British Columbia
into the Chicago area by mid- to late 2000.
MIDWEST PIPELINES
PEPL's major customers include 20 utilities located in the Midwest market
area that encompasses large portions of Michigan, Ohio, Indiana, Illinois and
Missouri. Trunkline's major customers include eight utilities located in
portions of Tennessee, Missouri, Illinois, Indiana and Michigan.
PEPL also owns and operates three underground storage fields located in
Illinois, Michigan and Oklahoma with working gas capacity of 31 Bcf. PEPL has
received FERC approval to transfer these storage fields to its subsidiary, Pan
Gas Storage Company (Pan Gas) and has filed for an effective transfer date of
April 1, 1999. Pan Gas is also the owner and operator of a 26 Bcf storage field
in Kansas. Trunkline owns and operates one 13 Bcf storage field in Louisiana.
Since the implementation of Order 636, each of PEPL, Trunkline and Pan Gas
provide firm and interruptible storage on an open-access basis. In addition to
owning and operating storage fields, PEPL also leases storage capacity. PEPL
and Trunkline have retained the right to use up to 15 Bcf and 10 Bcf,
respectively, of their storage capacity for system needs. See further
discussion of Order 636 in "Business, Natural Gas Transmission -- Regulation."
For a discussion of the proposed sale of the Midwest pipelines, see Note
11 to the Consolidated Financial Statements, "Commitments and Contingencies --
Other Commitments and Contingencies."
COMPETITION
The Company's interstate pipeline subsidiaries compete with other
interstate and intrastate pipeline companies in the transportation and storage
of natural gas. The principal elements of competition among pipelines are
rates, terms of service, and flexibility and reliability of service.
In the Mid-Atlantic and New England markets, TETCO competes directly with
Transcontinental Gas Pipe Line Corporation, Tennessee Gas Pipeline Company
(TGPC), Iroquois Gas Transmission System (Iroquois), CNG Transmission
Corporation and Columbia Gas Transmission Corporation. Algonquin competes
directly in certain market areas with TGPC and Iroquois. PEPL and Trunkline
compete directly with ANR Pipeline Company, Natural Gas Pipeline Company of
America and Texas Gas Transmission Corporation in the Midwest market area.
Natural gas competes with other forms of energy available to the Company's
customers and end-users, including electricity, coal and fuel oils. The primary
competitive factor is price. Changes in the availability or price of natural
gas and other forms of energy, the level of business activity, conservation,
legislation and governmental regulations, the capability to convert to
alternative fuels, and other factors, including weather, affect the demand for
natural gas in the areas served by the Company.
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REGULATION
The FERC has authority to regulate rates and charges for natural gas
transported in or stored for interstate commerce or sold by a natural gas
company in interstate commerce for resale. The FERC also has authority over the
construction and operation of pipeline and related facilities utilized in the
transportation and sale of natural gas in interstate commerce, including the
extension, enlargement or abandonment of such facilities. TETCO, Algonquin,
PEPL, Trunkline and Pan Gas hold certificates of public convenience and
necessity issued by the FERC, authorizing them to construct and operate the
pipelines, facilities and properties now in operation for which such
certificates are required, and to transport and store natural gas in interstate
commerce. For further discussion of regulatory matters, see "Management's
Discussion and Analysis of Results of Operations and Financial Condition,
Liquidity and Capital Resources -- Operating Cash Flows" and Note 4 to the
Consolidated Financial Statements, "Regulatory Matters -- Natural Gas
Transmission."
Natural Gas Transmission's pipelines operate as open-access transporters
of natural gas. In 1992, the FERC issued Order 636, which requires open-access
pipelines to provide firm and interruptible transportation services on an equal
basis for all gas supplies, whether purchased from the pipeline or from another
gas supplier. To implement this requirement, Order 636 provided, among other
things, for mandatory unbundling of services that historically had been
provided by pipelines into separate open-access transportation, sales and
storage services. Order 636 allows pipelines to recover eligible costs, known
as "transition costs," resulting from the implementation of Order 636. For
further discussion of Order 636, see Note 4 to the Consolidated Financial
Statements, "Regulatory Matters -- Natural Gas Transmission."
Natural Gas Transmission is subject to the jurisdiction of the EPA and
state environmental agencies. For a discussion of environmental regulation, see
"Business, Environmental Matters." Natural Gas Transmission is also subject to
the Natural Gas Pipeline Safety Act of 1968, which regulates gas pipeline and
LNG plant safety requirements, and to the Hazardous Liquid Pipeline Safety Act
of 1979, which regulates oil and petroleum pipelines.
FIELD SERVICES
Field Services gathers, processes, transports and markets natural gas and
produces and markets NGLs. Field Services owns and operates approximately
20,000 miles of natural gas gathering systems, including intrastate pipelines,
and 32 natural gas processing plants in the United States. Field Services also
has ownership interests in 12 other natural gas processing plants in the United
States.
Field Services gathers natural gas from production wellheads through
gathering systems located in ten states that serve major gas-producing regions
in the Rocky Mountain, Permian Basin, Mid-Continent and Gulf Coast (offshore
and onshore) areas. Field Services' gathering operations also include several
intrastate pipeline systems and two natural gas storage facilities.
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[MAP ILLUSTRATING FIELD SERVICES' GATHERING AND PROCESSING FACILITIES,
OFFICES & SUPPLY AREAS.]
Field Services' NGL processing operations involve the extraction of NGLs
from natural gas and, at certain facilities, the fractionation of the NGLs into
their individual components (ethane, propane, butane and natural gasoline). The
natural gas used in Field Services' processing operations is generally gathered
on its own gathering system or from the natural gas stream on the Company's
transmission system. NGLs are sold by Field Services to a variety of customers
ranging from large, multi-national petrochemical and refining companies to
small, family-owned retail propane distributors. NGL sales are based upon
current market-related prices. Field Services also produces helium at the
National Helium Corporation facility in Liberal, Kansas.
Field Services' operating results are significantly impacted by changes in
NGL prices, which declined approximately 25.7% in 1998 compared to 1997. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Quantitative and Qualitative Disclosures About Market Risk" for a
discussion of Field Services' exposure to changes in commodity prices.
In 1998, Field Services sold assets related to its crude oil gathering and
marketing business, including 1,800 miles of intrastate crude oil pipelines in
the Mid-Continent and South Texas areas and 450 miles of intrastate NGL
pipelines in the
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Texas Gulf Coast area, to TEPPCO Partners, L.P. (TEPPCO) in exchange for an
additional ownership interest in TEPPCO. As a result of the sale, the Company
now has a 2% general partner interest and a 19.1% limited partner interest in
TEPPCO, a publicly owned master limited partnership that transports refined
products and liquefied petroleum gases through a 4,300 mile pipeline system.
Field Services expects to complete the $1.35 billion acquisition of the
natural gas gathering, processing, fractionation and NGL pipeline business of
Union Pacific Resources (UPR), including its natural gas and NGL marketing
activities, on or about March 31, 1999. This acquisition will add approximately
7,200 miles of pipeline to the Company's existing gathering systems and
increase the number of processing plants that the Company operates and/or has
ownership interests in. Under the purchase agreement, much of UPR's U.S.
production will be gathered and processed by the Company for a minimum of ten
years. UPR will also dedicate for five years most of its natural gas and NGL
production to the Company to market.
See certain operating statistics of Field Services under "Business,
Operating Statistics." Activities of Field Services can fluctuate in response
to the seasonality affecting natural gas.
COMPETITION
Field Services competes with major integrated oil companies, major
interstate pipelines, national and local natural gas gatherers, brokers,
marketers and distributors for natural gas supplies, in gathering and
processing natural gas and in marketing and transporting natural gas and NGLs.
Competition for natural gas supplies is primarily based on efficiency,
reliability, availability of transportation and the ability to obtain a
satisfactory price for the producer's natural gas. Competition for customers is
based primarily upon reliability and price of delivered natural gas and NGLs.
REGULATION
The intrastate pipelines owned by the Field Services group are subject to
state regulation and, to the extent they provide services under Section 311 of
the Natural Gas Policy Act of 1978 (NGPA), are also subject to FERC regulation.
The natural gas gathering activities of the Field Services group are generally
not subject to regulation by the FERC, but are subject to state regulation.
Field Services is subject to the jurisdiction of the EPA and state
environmental agencies. For a discussion of environmental regulation, see
"Business, Environmental Matters." Certain operations of Field Services are
subject to the jurisdiction of the Department of Transportation and certain
similar state agencies whose regulations have incorporated certain provisions
of the Natural Gas Pipeline Safety Act of 1968, the Hazardous Liquid Pipeline
Safety Act of 1979, and subsequent amendments.
TRADING AND MARKETING
Trading and Marketing markets natural gas, electricity and other
energy-related products across North America. The Company owns a 60% interest
in Trading and Marketing's operations, with Mobil Corporation (Mobil) owning a
40% minority interest.
Trading and Marketing was formed in August 1996 as a natural gas and power
marketing joint venture with Mobil. Operations were expanded in June 1997 when
a wholly owned subsidiary of the Company acquired from affiliates of Louis
Dreyfus Corp. the remaining 50% ownership interest in Duke/Louis Dreyfus,
L.L.C. (D/LD), which the Company did not already own.
Trading and Marketing markets natural gas primarily to local distribution
companies, electric power generators, including Global Asset Development's
generation facilities, municipalities, industrial end-users and energy
marketing companies. Trading and Marketing markets electricity to investor
owned utilities, municipal power generators and other power marketers.
Operations are primarily in the United States and, to a lesser extent, in
Canada, and are serviced through 16 offices or operating centers.
Natural gas marketing operations encompass both on-system and off-system
sales. With respect to on-system sales, Trading and Marketing generally
purchases natural gas from Field Services' facilities and delivers the gas to
an intrastate or interstate pipeline for redelivery to another customer.
Natural Gas Transmission's pipelines are utilized for deliveries when prudent.
With respect to off-system sales, Trading and Marketing purchases natural gas
from producers, pipelines and other suppliers not connected with the Company's
facilities for resale to customers. Substantially all of Mobil's United States
and Canadian natural gas production is committed to be marketed through Trading
and Marketing through 2006.
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With respect to electricity marketing operations, Trading and Marketing
purchases electricity from third-party suppliers and from Global Asset
Development's generation facilities in California and Connecticut for resale to
customers.
Trading and Marketing has a portfolio of short-term and long-term sales
agreements with customers, the vast majority of which incorporate
market-sensitive pricing terms. Long-term gas purchase agreements with
producers, principally entered into in connection with on-system sales, also
generally include market-sensitive pricing provisions. Purchases and sales of
off-system gas and electricity supply are normally made under short-term
contracts. Purchase and sales commitments involving significant price and
location risk are generally hedged with commodity futures, swaps and options.
For information concerning Trading and Marketing's risk-management activities,
see "Management's Discussion and Analysis of Results of Operations and
Financial Condition, Quantitative and Qualitative Disclosures About Market Risk
- -- Commodity Price Risk" and Note 7 to the Consolidated Financial Statements,
"Risk Management and Financial Instruments -- Commodity Instruments --
Trading."
Trading and Marketing also provides energy management services, such as
supply and market aggregation, peaking services, dispatching, balancing,
transportation, storage, tolling, contract negotiation and administration, as
well as energy commodity risk management products and services.
See certain operating statistics of Trading and Marketing under "Business,
Operating Statistics." Activities of Trading and Marketing can fluctuate in
response to the seasonality affecting both electricity and natural gas.
COMPETITION
Trading and Marketing competes with major integrated oil companies, major
interstate pipelines and their marketing affiliates, brokers, marketers and
distributors and electric utilities and other electric power marketers for
natural gas supplies and in marketing natural gas, electricity and other energy
commodities. Competition in the energy marketing business is driven by the
price of commodities and services delivered, along with the quality and
reliability of services provided.
REGULATION
The energy marketing activities of Trading and Marketing may, in certain
circumstances, be subject to the jurisdiction of the FERC. Current FERC
policies permit Trading and Marketing entities subject to FERC jurisdiction to
market natural gas and electricity at market-based rates.
GLOBAL ASSET DEVELOPMENT
Global Asset Development develops, owns and operates energy-related
facilities worldwide. Global Asset Development conducts its operations
primarily through Duke Energy Power Services and Duke Energy International.
Deregulation of energy markets in the United States and abroad is
providing substantial opportunities for Global Asset Development to capitalize
on its broad capabilities. Global Asset Development is an active participant in
competitive power markets worldwide. Global Asset Development owns and operates
approximately 4,100 megawatts of generation, including projects under
construction, and has ownership interests in approximately 3,800 megawatts of
generation, including projects under construction. Global Asset Development
also owns and operates approximately 900 miles of pipeline systems in
Australia, including projects planned for construction, and has ownership
interests in approximately 1,000 miles of pipeline systems, including projects
under construction.
DUKE ENERGY POWER SERVICES
Duke Energy Power Services develops, owns and operates largely unregulated
electric generation projects across the United States. Duke Energy Power
Services focuses on acquisitions of existing energy production facilities,
greenfield and brownfield development opportunities and operating energy assets
throughout North America.
In 1998, Duke Energy Power Services completed the purchase of three
electric generating plants in California from Pacific Gas & Electric Company
(PG&E). Two of these electric generating plants sell electricity under the
terms of Reliability Must Run Agreements with the California Independent System
Operator, which purchases electricity at FERC regulated rates. The plants have
a combined net operating capacity of 2,645 megawatts. Pursuant to California's
electric restructuring law, Duke Energy Power Services entered into a contract
with PG&E to operate and maintain the facilities for two years following the
sale. Energy and capacity from the plants is being sold into the California
power exchange and under separate contracts.
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Other investments include a 32.5% indirect ownership interest in American
Ref-Fuel Company, which owns five waste-to-energy facilities in New York, New
Jersey, Massachusetts and Connecticut. Such facilities process about four
million tons of municipal solid waste per year and have an aggregate generating
capacity of 286 megawatts.
Projects under construction include: the second phase of the Bridgeport
Energy Project, a 520-megawatt combined cycle natural gas-fired merchant
generation plant in Connecticut; the Maine Independence Station, a 520-megawatt
combined cycle natural gas-fired merchant generation plant in Maine which is
scheduled to begin producing power in the summer of 2000; and the Hidalgo
project, a 510-megawatt power plant to be built in south Texas, which is
targeted to begin producing power in mid-2000.
In January 1999, Duke Energy Power Services agreed to a ten-year lease
with the Port of San Diego to operate and eventually replace the 706-megawatt
South Bay Power plant. The Port of San Diego will acquire this facility from
San Diego Gas & Electric Company. Duke Energy Power Services expects to close
on the lease valued at over $110 million by mid-1999. This plant's capacity is
excluded from the generation amounts previously discussed above.
DUKE ENERGY INTERNATIONAL
Duke Energy International develops, owns and operates energy projects
worldwide. Projects involve natural gas exploration, production, processing,
transportation and supply. Additionally, projects include generation, delivery
and marketing of electric power and thermal energy. Duke Energy International's
regional target areas are Asia Pacific, South America and Europe.
In 1998, Duke Energy International completed the purchase of the
Queensland Pipeline, a 389-mile pipeline in southeast Queensland, Australia.
Additional opportunities in Australia include the purchase of the rights to
develop and operate the 500-mile Eastern Gas Pipeline project in eastern
Australia. Construction of this pipeline project is scheduled to begin in July
1999 and completion is expected by mid-2000. Also, Duke Energy International
purchased power generation and transmission assets in western Australia and New
Zealand, including an ownership interest in a pipeline in western Australia.
This acquisition also includes a development proposal for a cogeneration plant
and a portfolio of international and Australian-based projects. This
transaction closed on January 22, 1999.
Duke Energy International's investments include a 25% indirect ownership
interest in National Methanol Company, which owns and operates a methanol and
MTBE (methyl tertiary butyl ether) plant in Saudi Arabia, and a 42.86% indirect
ownership interest in PT Puncakjaya, a 389-megawatt power generation facility
in Indonesia. Investments in South America include, among others: a 9.76%
indirect ownership interest in Hidroelectrica Piedra del Aguila S.A., a
1,400-megawatt hydroelectric generating facility in Argentina; a 51.5% indirect
ownership interest in Electroquil, S.A., a 168-megawatt diesel-fired generating
facility in Ecuador; a 24% indirect ownership interest in Sociedad Electrica de
Santiago S.A., a 370-megawatt gas-fired generating facility in Chile; a 21.9%
indirect ownership interest in Aguaytia Energy LLC, an integrated natural gas
and power project in Peru; and a 99% indirect ownership interest in PanEnergy
Exploration and Production (Peru) Ltd. Duke Energy International also operates
two liquefied natural gas (LNG) ships which have been chartered to Nigeria LNG
Limited for 22.5 years starting in 1999.
In February 1999, the Company, though its wholly owned subsidiary Duke
Energy International, L.L.C. commenced a concurrent cash tender offer in
Chilean pesos in Chile and the United States for 51% of the outstanding shares
of Empresa Nacional de Electricidad S.A. (Endesa-Chile). The estimated total
cash outlay is approximately $2.1 billion based on current exchange rates. The
tender offers are contingent upon, among other things, certain Endesa-Chile
shareholder approvals. If all approvals are obtained and the other conditions
to the tender offers are satisfied or waived, the transactions are expected to
be completed during the second quarter of 1999. Endesa-Chile controls 10,247
megawatts of generating capacity in Argentina, Brazil, Chile, Colombia and
Peru.
COMPETITION AND REGULATION
Global Asset Development experiences substantial competition from utility
companies in the United States and abroad and from independent companies.
Global Asset Development is subject to the Natural Gas Pipeline Safety Act
of 1968, which regulates LNG plant safety requirements.
Global Asset Development is subject to international, federal, state and
local environmental regulations. For a discussion of environmental regulation,
see "Business, Environmental Matters."
9
<PAGE>
OTHER ENERGY SERVICES
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through Duke Engineering &
Services, Duke/Fluor Daniel and DukeSolutions.
Duke Engineering & Services specializes in energy and environmental
projects and provides comprehensive engineering, quality assurance, project and
construction management and operating and maintenance services for all phases
of hydroelectric, nuclear and renewable power generation projects worldwide.
Duke/Fluor Daniel, operating through several entities, provides full
service siting, permitting, licensing, engineering, procurement, construction,
start-up, operating and maintenance services for fossil-fired plants, both
domestically and internationally. Subsidiaries of the Company and Fluor Daniel,
Inc. each own 50% of Duke/Fluor Daniel.
DukeSolutions provides integrated energy solutions to industrial,
commercial, institutional, governmental and wholesale customers and focuses on
increasing customers' efficiency, productivity and profitability through energy
cost savings.
Other Energy Services experiences substantial competition from utility
companies in the United States or abroad and from independent companies.
Other Energy Services is subject to the jurisdiction of the EPA and
international, state and local environmental agencies. For a discussion of
environmental regulation, see "Business, Environmental Matters."
REAL ESTATE OPERATIONS
Real Estate Operations conducts its business through Crescent Resources
Inc., which develops commercial and residential real estate projects and
manages forest holdings in the southeastern United States. At December 31,
1998, Real Estate Operations owned 4.2 million square feet of commercial space,
of which 76% was leased, with an additional 1.7 million square feet under
construction. At December 31, 1998, the commercial portfolio included 2.3
million square feet of warehouse space, 1.8 million square feet of office space
and 0.1 million square feet of retail space. In 1998, commercial buildings
totaling 1.3 million square feet and 850 residential developed lots were sold.
At December 31, 1998, Real Estate Operations had approximately 200,000 acres of
land under its management.
ENVIRONMENTAL MATTERS
The Company is subject to international, federal, state and local
regulations with regard to air and water quality, hazardous and solid waste
disposal and other environmental matters. Certain environmental regulations
affecting the Company include:
o The Clean Air Act Amendments of 1990;
o State Implementation Plans, which were issued by the EPA to 22 states and
the District of Columbia related to existing and new national ambient air
quality standards for ozone;
o The Federal Water Pollution Control Act Amendments of 1987, which require
permits for facilities that discharge treated wastewater into the
environment; and
o The Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), which can require any individual or entity which may have owned
or operated a disposal site, as well as transporters or generators of
hazardous wastes which were sent to such site, to share in remediation
costs for the site.
For further discussion of environmental matters involving the Company,
including possible liability and capital costs, see "Management's Discussion
and Analysis of Results of Operations and Financial Condition, Current Issues
- -- Environmental" and Note 11 to the Consolidated Financial Statements,
"Commitments and Contingencies -- Environmental." Except as set forth therein,
compliance with international, federal, state and local provisions which have
been enacted or adopted regulating the discharge of materials into the
environment, or otherwise protecting the environment, is not expected to have a
material adverse effect on the consolidated results of operations or financial
position of the Company.
10
<PAGE>
FOREIGN OPERATIONS AND EXPORT SALES
Foreign operations and export sales are not material to the Company's
business as a whole. For a discussion of risks associated with the Company's
foreign operations, see "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Quantitative and Qualitative Disclosures
About Market Risk -- Foreign Operations Risk" and Note 15 to the Consolidated
Financial Statements, "Subsequent Events (Unaudited)."
EMPLOYEES AND MANAGEMENT
At December 31, 1998, the Company had approximately 9,300 employees.
Approximately 500 employees are represented by the Oil, Chemical and Atomic
Workers International Union, AFL-CIO. Approximately 300 of these employees and
their bargaining unit will transfer to CMS Energy upon the sale of the Midwest
Pipelines in early 1999. The remaining employees represented by the Oil,
Chemical and Atomic Workers International Union, AFL-CIO are in a separate
bargaining unit. Terms of their contract are still being negotiated.
The officers and directors of the Company consist of certain executive
officers of Duke Energy. Duke Energy has entered into employment agreements
with certain key executives. Additionally, the Company's business units
maintain their own management structure.
11
<PAGE>
OPERATING STATISTICS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NATURAL GAS TRANSMISSION
Throughput Volumes, TBtu(a):
Northeast Pipelines
TETCO ...................................................... 1,148 1,300 1,349 1,234 1,194
Algonquin .................................................. 311 341 327 331 288
------ ----- ----- ----- -----
Total Northeast Pipelines ................................ 1,459 1,641 1,676 1,565 1,482
Midwest Pipelines ............................................
PEPL ....................................................... 560 659 687 663 626
Trunkline .................................................. 581 620 632 519 560
------ ----- ----- ----- -----
Total Midwest Pipelines .................................. 1,141 1,279 1,319 1,182 1,186
Intercompany eliminations .................................... (7) (58) (56) (44) (91)
------ ----- ----- ----- -----
Total Natural Gas Transmission ........................... 2,593 2,862 2,939 2,703 2,577
====== ===== ===== ===== =====
OTHER OPERATING STATISTICS
Natural Gas Gathered and Processed/Transported, TBtu/d(b) ..... 3.6 3.4 2.9 1.9 1.6
NGL Production, MBbl/d(c) ..................................... 110.2 108.2 78.5 54.8 49.4
Average Natural Gas Price per MMBtu(d) ........................ $ 2.11 $ 2.59 $ 2.59 $ 1.64 $ 1.90
Average NGL Price per Gallon .................................. $ 0.26 $ 0.35 $ 0.39 $ 0.33 $ 0.31
Natural Gas Marketed(e), TBtu/d ............................... 8.4 7.3 6.0 3.7 2.7
Electricity Marketed, Gwh(f) .................................. 98,991 64,650 4,229 513 --
</TABLE>
- ---------
(a) Trillion British thermal units
(b) Trillion British thermal units per day
(c) Thousand barrels per day
(d) Million British thermal units
(e) Includes volumes of Trading and Marketing and Field Services
(f) Gigawatt-hours
ITEM 2. PROPERTIES.
NATURAL GAS TRANSMISSION
TETCO's gas transmission system extends approximately 1,700 miles from
producing fields in the Gulf Coast region of Texas and Louisiana to Ohio,
Pennsylvania, New Jersey and New York. It consists of two parallel systems, one
consisting of three large-diameter parallel pipelines and the other consisting
of from one to three large-diameter pipelines over its length. TETCO's system,
including its gathering systems, has 73 compressor stations.
TETCO also owns and operates two offshore Louisiana gas supply systems,
which extend over 100 miles into the Gulf of Mexico and consist of 490 miles of
pipeline.
Algonquin's transmission system connects with TETCO's facilities in New
Jersey, and extends through New Jersey, New York, Connecticut, Rhode Island and
Massachusetts. The system consists of approximately 250 miles of pipeline with
six compressor stations.
PEPL's transmission system, which consists of four large-diameter parallel
pipelines and 13 mainline compressor stations, extends a distance of
approximately 1,300 miles from producing areas in the Anadarko Basin of Texas,
Oklahoma and Kansas through the states of Missouri, Illinois, Indiana and Ohio
into Michigan.
Trunkline's transmission system extends approximately 1,400 miles from the
Gulf Coast areas of Texas and Louisiana through the states of Arkansas,
Mississippi, Tennessee, Kentucky, Illinois and Indiana to a point on the
Indiana-Michigan border. The system consists principally of three
large-diameter parallel pipelines, 18 mainline compressor stations and one
offshore compressor platform.
Trunkline also owns and operates two offshore Louisiana gas supply systems
consisting of 337 miles of pipeline extending approximately 81 miles into the
Gulf of Mexico.
12
<PAGE>
The PEPL and Trunkline properties are included in the proposed sale of the
Midwest Pipelines, which is expected to close in early 1999.
For information concerning natural gas storage properties, see "Business,
Natural Gas Transmission."
FIELD SERVICES
For information regarding the properties of Field Services, see "Business,
Field Services."
GLOBAL ASSET DEVELOPMENT
Duke Energy Power Services owns several electric generating stations,
including three in California and one in Connecticut (95.9% ownership)
currently under expansion. These power plants have a combined capacity of 3,165
MW. For more information regarding electric generating stations, see "Business,
Global Asset Development -- Duke Energy Power Services."
A subsidiary of the Company owns a marine terminal, storage and
regasification facility for LNG located in Louisiana. This LNG facility is
operated by Duke Energy International and is included in the proposed sale of
the Midwest Pipelines as previously discussed. The design output capacity of
the facility is approximately 700 million cubic feet per day and its storage
capacity is approximately 1.8 million barrels, which approximates 6 Bcf. See
further information regarding the properties of Duke Energy International at
"Business, Global Asset Development -- Duke Energy International."
REAL ESTATE OPERATIONS
For information regarding the properties of Real Estate Operations, see
"Business, Real Estate Operations."
OTHER
None of the properties used in connection with the Company's other
business activities are considered material to the Company's operations as a
whole.
ITEM 3. LEGAL PROCEEDINGS.
On January 8, 1999, a subsidiary of the Company agreed to a Compliance
Order on Consent (Consent Order) with the Colorado Department of Public Health
and Environment concerning alleged air quality permit reporting and
record-keeping violations at the Greeley Natural Gas Processing Plant and
several other Colorado facilities. This Consent Order superseded an earlier
Compliance Order and Assessment of Civil Penalty for the Greeley Natural Gas
Processing Plant. This Consent Order assesses a civil and noncompliance penalty
of $54,000 and requires supplemental environmental projects of $525,000 that
involve implementing additional air emission controls to reduce air emissions
below standards.
The Illinois Environmental Protection Agency has indicated to a subsidiary
of the Company that it intends to initiate an environmental enforcement
proceeding relating to alleged air quality permit violations at a natural gas
compressor station. This proceeding could result in a penalty in excess of
$100,000.
Management believes that the resolution of these matters will not have a
material adverse effect on consolidated results of operations or financial
position.
See Note 11 to the Consolidated Financial Statements, "Commitments and
Contingencies" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Current Issues -- Environmental" for
further discussion of legal proceedings.
13
<PAGE>
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
All of the outstanding common stock of the Company is, as of the date
hereof, owned by Duke Energy. There is no market for the Company's common
stock. Dividends on the Company's common stock will be paid when declared by
the Board of Directors. At present, the Company has no plans to pay a dividend
on the common stock.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
1998 1997(a) 1996(a) 1995(a) 1994(a)
------------- --------- --------- --------- -------------
IN MILLIONS
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
Operating revenues ......................... $13,059 $11,915 $7,816 $5,188 $ 4,753
Operating expenses ......................... 12,023 11,079 6,947 4,394 4,071
------- ------- ------ ------ -------
Operating income ........................... 1,036 836 869 794 682
Other income and expenses .................. 101 37 20 18 (2)
------- ------- ------ ------ -------
Earnings before interest and taxes ......... 1,137 873 889 812 680
Interest expense ........................... 237 214 232 240 232
Minority interests ......................... 71 22 6 -- --
------- ------- ------ ------ -------
Earnings before income taxes ............... 829 637 651 572 448
Income taxes ............................... 310 257 252 224 181
------- ------- ------ ------ -------
Income before extraordinary item ........... 519 380 399 348 267
Extraordinary loss ......................... (8) -- (17) -- --
------- ------- ------ ------ -------
Net income ................................. $ 511 $ 380 $ 382 $ 348 $ 267
======= ======= ====== ====== =======
BALANCE SHEET
Total assets ............................... $13,856 $11,097 $9,752 $8,226 $ 7,984
Long-term debt ............................. $ 2,884 $ 2,919 $2,028 $2,215 $ 2,446
</TABLE>
- ---------
(a) Financial information reflects accounting for the 1997 combination of the
Company with PanEnergy Corp similar to a pooling of interests. As a
result, the financial information gives effect to the combination as if it
had occurred on January 1, 1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
INTRODUCTION
Duke Capital Corporation (collectively with its subsidiaries, the
"Company") is a wholly owned subsidiary of Duke Energy Corporation (Duke
Energy) and serves as the parent for certain of Duke Energy's non-utility and
other operations. The Company provides financing and credit enhancement
services for its subsidiaries and conducts its operations through six business
segments:
o Natural Gas Transmission
o Field Services
o Trading and Marketing
o Global Asset Development
o Other Energy Services
o Real Estate Operations
These segments were defined as a result of the Company adopting Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
Natural Gas Transmission, through its Northeast Pipelines, provides
interstate transportation and storage of natural gas for customers primarily in
the Mid-Atlantic and New England states. Until the expected sale of the Midwest
Pipelines in early 1999, Natural Gas Transmission also provides interstate
transportation and storage services in the midwest states. See further
discussion of the proposed sale of the Midwest Pipelines in the Liquidity and
Capital Resources section of Management's Discussion and Analysis. The
interstate natural gas transmission and storage operations are subject to the
rules and regulations of the Federal Energy Regulatory Commission (FERC).
14
<PAGE>
Field Services gathers, processes, transports and markets natural gas and
produces and markets natural gas liquids (NGL). Field Services operates
gathering systems in ten states that serve major gas-producing regions in the
Rocky Mountain, Permian Basin, Mid-Continent and Gulf Coast areas.
Trading and Marketing markets natural gas, electricity and other
energy-related products across North America. The Company owns a 60% interest
in Trading and Marketing's operations, with Mobil Corporation owning a 40%
minority interest.
Global Asset Development develops, owns and operates energy-related
facilities worldwide. Global Asset Development conducts its operations
primarily through Duke Energy Power Services, LLC (Duke Energy Power Services)
and Duke Energy International, LLC (Duke Energy International).
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through Duke Engineering &
Services, Inc. (Duke Engineering & Services), Duke/Fluor Daniel and
DukeSolutions, Inc. (DukeSolutions).
Real Estate Operations conducts its business through Crescent Resources,
Inc., which develops high quality commercial and residential real estate
projects and manages forest holdings in the southeastern United States.
On June 18, 1997, Duke Energy completed a stock-for-stock merger with
PanEnergy Corp (PanEnergy). Subsequently, Duke Energy contributed the common
stock of PanEnergy to the Company. The combination of the Company and PanEnergy
was accounted for similar to a pooling of interests; therefore, the
Consolidated Financial Statements and other financial information included in
this annual report for periods prior to the combination include the combined
historical financial results of the Company and PanEnergy. (See Note 2 to the
Consolidated Financial Statements, "Business Combinations".)
Management's Discussion and Analysis should be read in conjunction with
the Consolidated Financial Statements.
RESULTS OF OPERATIONS
In 1998, net income increased 34.5% over 1997, to $511 million, net of an
extraordinary loss of $8 million. The increase in net income was primarily due
to increased energy marketing activities, expansions and acquisitions, gains on
sales of assets and the absence of non-recurring merger related costs incurred
in 1997. These increases were partially offset by decreased NGL prices and
increased minority interests.
Net income in 1997 decreased slightly as compared to 1996, from $382
million in 1996 to $380 million in 1997. The decrease was due primarily to
increases in non-recurring merger related costs incurred in 1997, Trading and
Marketing operations due primarily to growth and amortization of goodwill
associated with the purchase of the remaining 50% ownership interest of the
Duke/Louis Dreyfus joint venture (see Note 2 to the Consolidated Financial
Statements, "Business Combinations"). These increases were offset by Natural
Gas Transmission's market-expansion projects placed in service and an
extraordinary item related to the early retirement of debt in 1996.
Operating income for 1998 was $1,036 million compared to $836 million in
1997 and $869 million in 1996. Earnings before interest and taxes (EBIT) were
$1,137 million, $873 million and $889 million for 1998, 1997 and 1996,
respectively. Operating income and earnings before interest and taxes,
excluding the effect of gains on asset sales of $34 million by Field Services
in 1998, are affected by the same fluctuations for the Company and each of its
business segments. Earnings before interest and taxes by business segment are
summarized below and are discussed by business segment thereafter.
EARNINGS BEFORE INTEREST AND TAXES BY BUSINESS SEGMENT
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997 1996
-------- -------- -------
IN MILLIONS
<S> <C> <C> <C>
Natural Gas Transmission ......... $ 702 $ 624 $ 595
Field Services ................... 76 157 152
Trading and Marketing ............ 122 44 58
Global Asset Development ......... 80 5 --
Other Energy Services ............ 10 18 20
Real Estate Operations ........... 142 98 88
Other Operations ................. 5 (73) (24)
------ ----- -----
Consolidated EBIT ................ $1,137 $ 873 $ 889
====== ===== =====
</TABLE>
15
<PAGE>
Other Operations primarily includes communication services, water services
and certain unallocated corporate costs. Included in the amounts discussed
below are intercompany transactions that are eliminated in the Consolidated
Financial Statements.
NATURAL GAS TRANSMISSION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
--------- --------- ---------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
Operating Revenues ...................... $1,528 $1,572 $1,556
Operating Expenses ...................... 864 964 973
------ ------ ------
Operating Income ........................ 664 608 583
Other Income, Net of Expenses ........... 38 16 12
------ ------ ------
EBIT .................................... $ 702 $ 624 $ 595
====== ====== ======
Volumes, Throughput -- TBtu (a) ......... 2,593 2,862 2,939
</TABLE>
- ---------
(a) Trillion British thermal units
Earnings before interest and taxes for Natural Gas Transmission increased
$78 million in 1998 over 1997. Earnings before interest and taxes for Northeast
Pipelines increased $56 million to $476 million in 1998 compared to 1997,
primarily as a result of the favorable resolution of regulatory issues related
to gas supply realignment costs, favorable state property tax rulings and
increased market expansion projects. These increases were partially offset by a
decrease in throughput primarily as a result of mild winter weather.
In 1998, earnings before interest and taxes for Midwest Pipelines
increased 10.8% compared to 1997, primarily due to a gain on the sale of the
general partner interests in Northern Border Partners, L.P. and non-recurring
1997 litigation expenses. These increases were partially offset by the
favorable resolution of certain regulatory matters in 1997, which was reflected
as additional revenue and other income. See the Liquidity and Capital Resources
- - Investing Cash Flows section of Management's Discussion and Analysis for a
discussion of the expected sale of the Midwest Pipelines in early 1999. (See
also Note 11 to the Consolidated Financial Statements, "Commitments and
Contingencies.")
Earnings before interest and taxes for Natural Gas Transmission increased
4.9% in 1997 over 1996, with increases in earnings at Northeast Pipelines and
Midwest Pipelines of 5.3% and 4.0%, respectively. Earnings before interest and
taxes for the Northeast Pipelines increased primarily due to market-expansion
projects placed in service.
For the Midwest Pipelines, earnings before interest and taxes increased
primarily due to the favorable resolution of certain regulatory matters in 1997
in amounts in excess of those resolved in 1996, which was reflected as
additional revenue and other income. This increase was partially offset by 1997
litigation expenses.
FIELD SERVICES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
----------- ----------- -----------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
Operating Revenues ........................................ $ 2,639 $ 3,055 $ 2,637
Operating Expenses ........................................ 2,598 2,898 2,487
------- ------- -------
Operating Income .......................................... 41 157 150
Other Income, Net of Expenses ............................. 35 -- 2
------- ------- -------
EBIT ...................................................... $ 76 $ 157 $ 152
======= ======= =======
Volumes
Natural Gas Gathered and Processed/Transported, TBtu/d (a) 3.6 3.4 2.9
Natural Gas Marketed, TBtu/d .............................. 0.4 0.4 0.5
NGL Production, MBbl/d (b) ................................ 110.2 108.2 78.5
</TABLE>
- ---------
(a) Trillion British thermal units per day
(b) Thousand barrels per day
16
<PAGE>
In 1998, earnings before interest and taxes for Field Services decreased
$81 million compared to 1997, primarily due to a decrease in average NGL prices
of approximately $0.09 per gallon, or 25.7%. The decrease in earnings before
interest and taxes was partially offset by $34 million of gains on sales of
assets which are included in other income.
Earnings before interest and taxes for Field Services increased 3.3% in
1997 over 1996, primarily due to higher volumes as a result of acquisitions in
1996. Natural gas gathered and processed volumes increased 17.2%, and NGL
production increased 37.8% in 1997 compared to 1996. Partially offsetting these
increases were lower NGL prices of approximately $0.04 per gallon, or 8%, and
higher natural gas prices.
TRADING AND MARKETING
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
----------- ----------- -----------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
Operating Revenues .................... $ 8,785 $ 7,489 $ 3,814
Operating Expenses .................... 8,665 7,446 3,758
-------- -------- -------
Operating Income ...................... 120 43 56
Other Income, Net of Expenses ......... 2 1 2
-------- -------- -------
EBIT .................................. $ 122 $ 44 $ 58
======== ======== =======
Volumes
Natural Gas Marketed, TBtu/d .......... 8.0 6.9 5.5
Electricity Marketed, GWh(a) .......... 98,991 64,650 4,229
</TABLE>
- ---------
(a) Gigawatt-hour
In 1998, earnings before interest and taxes for Trading and Marketing
increased $78 million over 1997. The increase resulted primarily from increased
financial trading margins and electricity margins, partially offset by
increased expenses due to business growth. Electricity volumes marketed
increased primarily as a result of acquiring the remaining 50% ownership
interest in the Duke/Louis Dreyfus, L.L.C. (D/LD) joint venture in June 1997.
Earnings before interest and taxes for Trading and Marketing decreased $14
million in 1997 compared to 1996. The acquisition of the remaining 50%
ownership interest in the D/LD joint venture in 1997, coupled with a full year
of operations of the joint venture with Mobil Corporation formed in August
1996, accounted for the significant increases in Trading and Marketing
revenues, related operating expenses (including increased purchased power
expense) and volumes in 1997 over 1996. Increased natural gas volumes marketed
of 25.5% in 1997, in addition to increased natural gas margins from trading
activities, were largely offset by the emerging electric power trading and
marketing activities. Higher operating expenses, due primarily to increased
personnel levels and system development costs to provide the necessary
infrastructure for growth in the trading and marketing business, resulted in a
decrease in earnings before interest and taxes in 1997 as compared to 1996.
GLOBAL ASSET DEVELOPMENT
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------ ---------- ---------
IN MILLIONS
<S> <C> <C> <C>
Operating Revenues .................... $319 $123 $72
Operating Expenses .................... 261 129 73
---- ---- ---
Operating Income (Loss) ............... 58 (6) (1)
Other Income, Net of Expenses ......... 22 11 1
---- ----- -----
EBIT .................................. $ 80 $ 5 $--
==== ===== =====
</TABLE>
In 1998, earnings before interest and taxes for Global Asset Development
increased $75 million over 1997. The increase results primarily from business
expansion and acquisitions, including Duke Energy Power Services' July 1, 1998
acquisition of three electric generating stations in California from Pacific
Gas & Electric Company (PG&E) and December 1997 acquisition of an indirect
32.5% ownership interest in American Ref-Fuel Company. Duke Energy
International also contributed to the increase in earnings before interest and
taxes in 1998 compared to 1997 through an expansion to the PT Puncakjaya
17
<PAGE>
power generation facility in Indonesia. This increase was partially offset by
decreased earnings resulting from lower prices at National Methanol, a methanol
and MTBE (methyl tertiary butyl ether) plant in Saudi Arabia.
In 1997, earnings before interest and taxes increased slightly compared to
1996, due primarily to business expansion and acquisitions, including the
December 1997 acquisition of an ownership interest in American Ref-Fuel
Company, and a gain on the sale of an investment. These increases were
partially offset by increased expenses due to business growth.
OTHER ENERGY SERVICES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997 1996
------ ---------- -------
IN MILLIONS
<S> <C> <C> <C>
Operating Revenues .................... $521 $376 $204
Operating Expenses .................... 511 353 184
---- ---- ----
Operating Income ...................... 10 23 20
Other Income, Net of Expenses ......... -- (5) --
---- ---- ----
EBIT .................................. $ 10 $18 $ 20
==== ==== ====
</TABLE>
In 1998, earnings before interest and taxes for Other Energy Services
decreased $8 million compared to 1997, primarily due to decreased earnings of
Duke Engineering & Services. Earnings before interest and taxes for Other
Energy Services decreased $2 million in 1997 compared to 1996, primarily as a
result of start-up expenses of DukeSolutions partially offset by increased
earnings of Duke Engineering & Services due to growth.
REAL ESTATE OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ------ -------
IN MILLIONS
<S> <C> <C> <C>
Operating Revenues .................... $181 $124 $114
Operating Expenses .................... 39 26 26
---- ---- ----
Operating Income ...................... 142 98 88
Other Income, Net of Expenses ......... -- -- --
---- ---- ----
EBIT .................................. $142 $ 98 $ 88
==== ==== ====
</TABLE>
In 1998, earnings before interest and taxes for Real Estate Operations
increased 44.9% compared to 1997, primarily as a result of increased project
and lake lot sales and a gain on land sales in the Jocassee Gorges region of
South Carolina. Earnings before interest and taxes for Real Estate Operations
increased 11.4% in 1997 over 1996, primarily due to gains associated with bulk
land sales in 1997.
OTHER OPERATIONS
Earnings before interest and taxes for Other Operations increased in 1998
compared to 1997, primarily as a result of the absence of non-recurring 1997
merger-related costs and the favorable resolution of certain contingent items
in 1998. The increase in earnings before interest and taxes was partially
offset by a 1997 gain on the sale of the ownership interest in the Midland
Cogeneration Venture.
Earnings before interest and taxes for Other Operations declined $49
million in 1997 compared to 1996. Contributing to the decrease were increased
merger-related expenses in 1997 compared to 1996 and the 1997 amortization of
goodwill associated with the purchase of the remaining 50% ownership interest
in the D/LD joint venture. This decline was partially offset by the sale of the
ownership interest in the Midland Cogeneration Venture in 1997.
OTHER IMPACTS ON NET INCOME
Interest expense increased 10.7% in 1998 over 1997 due to higher average
debt balances outstanding. In 1997, interest expense decreased $18 million, or
7.8%, as compared to 1996 as a result of lower interest rates.
18
<PAGE>
In 1998, minority interests increased $49 million compared to 1997. This
increase includes 1998 dividends for trust preferred securities that were
issued in 1998. See further discussion of the issuances of trust preferred
securities in Management's Discussion and Analysis of Results of Operations and
Financial Condition, Liquidity and Capital Resources. Excluding these
dividends, minority interests relate primarily to the trading and marketing
joint venture with Mobil Corporation formed in August 1996.
In January 1998, TEPPCO Partners, L.P., in which a subsidiary of the
Company has a 2% general partner interest and a 19.1% limited partner interest,
redeemed certain First Mortgage Notes. A non-cash extraordinary loss of $8
million, net of income tax of $5 million, was recorded related to costs of the
early retirement of that debt.
On October 1, 1996, a subsidiary of the Company redeemed its $150 million,
10% debentures and its $100 million, 10 1/8% debentures, both due 2011. A
non-cash extraordinary loss of $17 million, net of income tax of $10 million,
was recorded related to the unamortized discount on this early retirement of
debt.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING CASH FLOWS. Assets and liabilities recorded in the Consolidated
Balance Sheets related to natural gas transition cost recoveries and the
related cash flow impacts are affected by state and federal regulatory
initiatives and specific agreements. For more information see Note 4 to the
Consolidated Financial Statements, "Regulatory Matters."
On August 29, 1998, the FERC approved a settlement from Texas Eastern
Transmission Corporation (TETCO), a subsidiary of the Company, which will
accelerate recovery of natural gas transition costs and reduce depreciation
expense to more appropriately reflect the estimated useful lives of its
facilities, principally interstate natural gas pipelines. The order was
effective October 1, 1998 and includes a rate moratorium until 2004. Cash flows
from operations are not expected to change for the first two years after
implementation due to the offsetting effect on customer rates of the reduced
depreciation expense and increased recovery of natural gas transition costs.
When the natural gas transition costs are fully recovered, cash flows from
operations are expected to decrease during 2001 through 2003 by an estimated
total of $270 million. For more information concerning the settlement, see Note
4 to the Consolidated Financial Statements, "Regulatory Matters."
INVESTING CASH FLOWS. Capital and investment expenditures were
approximately $1.9 billion in 1998 compared to approximately $1.3 billion in
1997. This increase was primarily due to business expansion by Global Asset
Development, which included Duke Energy Power Services' $501 million purchase
of three electric generating stations in California from PG&E and the
completion of the first phase of Bridgeport Energy, a $265 million,
520-megawatt combined cycle natural gas-fired merchant generation plant.
Business expansion for Natural Gas Transmission and Field Services also
contributed to the increase in capital and investment expenditures. The
increase was partially offset by the acquisition of the remaining 50% ownership
of the D/LD joint venture in June 1997.
Capital and investment expenditures in 1997 included the acquisition of
the remaining 50% ownership interest in the D/LD joint venture for $247
million, which substantially represented goodwill, and Global Asset
Development's acquisition of an ownership interest in American Ref-Fuel Company
for $237 million. The increase in capital and investment expenditures in 1997
over 1996 also included increased business expansion for the Natural Gas
Transmission segment. These increases were partially offset by the 1996
acquisition of certain assets from Mobil Corporation.
Projected 1999 capital and investment expenditures for Natural Gas
Transmission, including allowance for funds used during construction, are
approximately $400 million and do not include projections related to the
Midwest Pipelines which are expected to be sold in early 1999. These
projections include the completion of the Maritimes & Northeast Pipeline
project, which will deliver natural gas to markets in the Canadian Maritimes
provinces and the northeastern United States from a supply basin offshore Nova
Scotia. These projections also include other market expansion projects and
costs relating to existing assets.
The Company plans to continue to significantly grow several of its
business segments: Field Services, Global Asset Development, Trading and
Marketing and Other Energy Services. Expansion opportunities for Field Services
include the planned $1.35 billion acquisition of the natural gas gathering,
processing, fractionation and NGL pipeline business of Union Pacific Resources
along with its natural gas and NGL marketing activities. The transaction is
expected to close in the first half of 1999.
Expansion opportunities for Global Asset Development's international
division, Duke Energy International, include the $315 million purchase of power
generation and transmission assets in western Australia and New Zealand,
including an ownership interest in a pipeline in western Australia. This
acquisition also includes a development proposal for a cogeneration plant and a
portfolio of international and Australian-based projects. This transaction
closed on January 22, 1999.
19
<PAGE>
Also, Duke Energy International recently purchased the rights to develop
and operate the 500-mile Eastern Gas Pipeline project in eastern Australia.
Construction of this $270 million pipeline project is scheduled to begin in
July 1999 and completion is expected by the middle of 2000.
Expansion opportunities for Global Asset Development's domestic division,
Duke Energy Power Services, include the continuation of greenfield projects,
such as the Bridgeport Energy project and the Maine Independence Station, a
520-megawatt combined cycle natural gas-fired merchant generation plant in
Maine which is scheduled to begin producing power in the summer of 2000. Other
expansion opportunities include the Hidalgo project, a 510-megawatt power plant
to be built in south Texas, which is targeted to begin producing power in
mid-2000. Other similar initiatives in 1999 for both Duke Energy International
and Duke Energy Power Services will likely require significant capital and
investment expenditures, which will be subject to periodic review and revision
and may vary significantly depending on the value-added opportunities
presented.
Projected 1999 capital and investment expenditures for Trading and
Marketing, Other Energy Services and Real Estate Operations are approximately
$30 million, $90 million and $300 million, respectively. All projected capital
and investment expenditures are subject to periodic review and revision and may
vary significantly depending on acquisition opportunities, market volatility,
economic trends and the value-added opportunities presented.
In October 1998, the Company, through its wholly owned subsidiaries,
PanEnergy and Texas Eastern Corporation, entered into an agreement to sell
Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas Company (Trunkline)
and additional storage related to those systems, which substantially comprise
the Midwest Pipelines, along with Trunkline LNG Company, to CMS Energy
Corporation. The sales price of $2.2 billion involves cash proceeds of $1.9
billion and the assumption of existing PEPL debt of approximately $300 million.
The sale is expected to close in early 1999 and will result in an after-tax
gain of approximately $700 million. The sale is contingent upon receipt of
clearances under the Hart-Scott-Rodino Act.
FINANCING CASH FLOWS. The Company's consolidated capital structure at
December 31, 1998, including short-term debt, was 40.5% debt, 7.4% trust
preferred securities and 52.1% common equity. Fixed charges coverage,
calculated using the Securities and Exchange Commission method, was 4.2 times,
3.7 times and 3.6 times for 1998, 1997 and 1996, respectively.
The Company plans to continue to significantly grow several of its
business segments: Field Services, Trading and Marketing, Global Asset
Development and Other Energy Services. These growth opportunities, along with
debt repayments and operating and investing requirements, are expected to be
funded by cash from operations, external debt financing and the proceeds from
the sale of the Midwest Pipelines.
In July 1998, the Company issued $400 million of Senior Unsecured Notes.
Also during 1998, the Company's business trusts, which are treated as wholly
owned subsidiaries of the Company for financial reporting purposes, issued $600
million of trust preferred securities. (See Note 10 to the Consolidated
Financial Statements, "Guaranteed Preferred Beneficial Interests in
Subordinated Notes of Duke Capital.")
Under its commercial paper facilities, the Company had the ability to
borrow up to $1.55 billion and $1.25 billion as of December 31, 1998 and 1997,
respectively. At December 31, 1998 and 1997, the Company's various bank credit
facilities totaled approximately $1.7 billion and $1.4 billion, respectively.
At December 31, 1998, $526 million was outstanding under the commercial paper
facilities and $100 million was outstanding under the bank credit facilities.
As of December 31, 1998, the Company and its subsidiaries, excluding PEPL,
had authority to issue up to $100 million aggregate principal amount of debt
under shelf registrations filed with the Securities and Exchange Commission. On
January 27, 1999, the Company filed a $1 billion shelf registration statement,
which was declared effective by the Securities and Exchange Commission on
February 10, 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK POLICIES. The Company is exposed to market risks associated with
commodity prices, interest rates and foreign exchange rates. Comprehensive risk
management policies have been established by Duke Energy's Corporate Risk
Management Committee (CRMC) to monitor and control these market risks. The CRMC
is chaired by the Chief Financial Officer and primarily comprises senior
executives. The CRMC has responsibility for oversight of all corporate energy
risk management and approving energy financial exposure limits, as well as
responsibility for oversight of interest rate risk, foreign currency risk and
credit risk.
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<PAGE>
INTEREST RATE RISK. The Company is exposed to risk resulting from changes
in interest rates as a result of its issuance of variable-rate debt, fixed-rate
debt and trust preferred securities and commercial paper, as well as interest
rate lock agreements. The Company manages its interest rate exposure by
limiting its variable-rate and fixed-rate exposure to a certain percentage of
total capitalization, as set by policy, and by monitoring the effects of market
changes in interest rates. (See Notes 1, 6, 9 and 10 to the Consolidated
Financial Statements.)
If market interest rates average 1% higher (lower) in 1999 than in 1998,
interest expense would increase (decrease), and earnings before income taxes
would decrease (increase) by approximately $7 million. Comparatively, had
interest rates averaged 1% higher (lower) in 1998 than in 1997, interest
expense would have increased (decreased), and earnings before income taxes
would have decreased (increased) by approximately $11 million. These amounts
were determined by considering the impact of the hypothetical interest rates on
the variable-rate securities outstanding as of December 31, 1998 and 1997. In
the event of a significant change in interest rates, management would likely
take actions to manage its exposure to the change. However, due to the
uncertainty of the specific actions that would be taken and their possible
effects, the sensitivity analysis assumes no changes in the Company's financial
structure.
COMMODITY PRICE RISK. The Company, substantially through its subsidiaries,
is exposed to the impact of market fluctuations in the price and transportation
costs of natural gas, electricity and petroleum products marketed. The Company
employs established policies and procedures to manage its risks associated with
these market fluctuations using various commodity derivatives, including
futures, swaps and options. (See Notes 1 and 6 to the Consolidated Financial
Statements, "Summary of Significant Accounting Policies" and "Risk Management
and Financial Instruments.") The risk in the commodity trading portfolio is
measured on a daily basis utilizing a Value-at-Risk model to determine the
maximum potential one-day favorable or unfavorable Daily Earnings at Risk
(DER). The DER is monitored in comparison to established thresholds. Other
measures are also utilized to monitor the risk in the commodity trading
portfolio on a monthly and annual basis.
The DER computations are based on a historical simulation, which utilizes
price movements over a specified period to simulate forward price curves in the
energy markets to estimate the favorable or unfavorable impact of one-day's
price movement on the existing portfolio. The historical simulation emphasizes
the most recent market activity, which is considered the most relevant
predictor of future market movements for natural gas, electricity and petroleum
products. The DER computations utilize several key assumptions, including a 95%
confidence level for the resultant price movement and the holding period
specified for the calculation. The Company's calculation includes commodity
derivative instruments and forwards held for trading purposes and excludes the
effects of embedded physical options in the trading portfolio. At December 31,
1998 and 1997, the estimated potential one-day favorable or unfavorable impact
on earnings before income taxes related to commodity instruments held for
trading purposes was approximately $10 million and $2 million, respectively.
During 1998, the average estimated potential one-day favorable or unfavorable
impact on earnings before income taxes related to commodity instruments held
for trading purposes was approximately $5 million. The increase in 1998
compared to 1997 is a result of an increase in the authorized energy financial
exposure limit, which was approved by the CRMC. Changes in markets inconsistent
with historical trends could cause actual results to exceed predicted limits.
Market risks associated with commodity derivatives held for purposes other than
trading were not material at December 31, 1998 and 1997.
Subsidiaries of the Company are also exposed to market fluctuations in the
prices of NGLs related to their ongoing gathering and processing operating
activities. The Company closely monitors the risks associated with NGL price
changes on its future operations, and where appropriate, uses crude oil and
natural gas commodity instruments to hedge NGL prices. If NGL prices averaged
one cent per gallon less in 1998, earnings before income taxes would have
decreased by approximately $8 million. The Company generally does not maintain
a material inventory of NGLs or actively trade commodity derivatives related to
NGLs.
FOREIGN OPERATIONS RISK. The Company is exposed to foreign currency risk,
sovereign risk and other foreign operations risks arising from equity
investments in international affiliates and businesses owned and operated in
foreign countries. At December 31, 1998 the Company had more than $100 million
invested in Australia. Investments in other foreign countries were not material
at December 31, 1998 or 1997. In order to mitigate risks associated with
foreign currency fluctuations, the majority of contracts entered into by the
Company or its affiliates are denominated in or indexed to the U.S. dollar or
may be hedged through issuance of debt denominated in the foreign currency. The
Company also uses foreign currency swaps, where appropriate, to manage its risk
related to foreign currency fluctuations. Other exposures to foreign currency
risk, sovereign risk or other foreign operations risk are periodically reviewed
by management and were not material to consolidated results of operations or
financial position during 1998 or 1997.
21
<PAGE>
CURRENT ISSUES
OPERATIONS OUTLOOK. The Company's business strategy is to develop regional
centers of energy assets involving gas, electric generation and marketing in
the United States and internationally. In the United States, the Company is
aggressively investing in new pipelines and power plants in the Northeast, Gulf
Coast and West. Internationally, the Company is focusing on opportunities in
Asia Pacific, South America and Europe.
The Northeast Pipelines are an essential part of Natural Gas
Transmission's strategy to advance projects that provide expanded services to
meet the specific needs of customers. The proposed sale of the Midwest
Pipelines allows Natural Gas Transmission to focus on regions, such as the
northeastern U.S., with increasing demand for gas. Northeast pipeline projects
will provide transportation from new supplies in both eastern and western
Canada in addition to traditional domestic supply basins.
The Company plans to significantly grow several of its business segments:
Field Services, Trading and Marketing, Global Asset Development and Other
Energy Services. Deregulation of energy markets in the United States and abroad
is providing substantial opportunities for these segments to capitalize on
their broad capabilities. Field Services will expand through the purchase of
the natural gas gathering, processing, fractionation and NGL pipeline business
from Union Pacific Resources along with its natural gas and NGL marketing
activities.
Global Asset Development expects to continue strong growth through
acquisitions, construction of greenfield projects and expansion of existing
facilities as value-added opportunities present themselves. The Company's
combination of assets and capabilities that span the energy value chain have
contributed to Global Asset Development's successful combination of natural gas
pipeline capabilities, power generation, energy marketing and other services.
This demonstrated domestic strategy is now being deployed internationally in
the Asia Pacific area and in South America. Other Energy Services seeks to grow
with types of services including comprehensive energy efficiencies in food,
textile and government facilities.
The strong real estate market in the Southeast continues to present
substantial growth opportunities for Real Estate Operations. In 1998, Real
Estate Operations initiated development of significant office and industrial
facilities in each of its established markets to capitalize on market
conditions.
While the proposed sale of the Midwest Pipelines will provide an
opportunity to deploy capital into areas of higher growth, the Company expects
to experience some near-term earnings pressure as a result of the sale. The
Company believes that its strategy of developing regional centers of energy
assets will return long-term growth and increase shareholder value.
NATURAL GAS COMPETITION. WHOLESALE COMPETITION. On July 29, 1998, the FERC
issued a Notice of Proposed Rulemaking (NOPR) on short-term natural gas
transportation services, which proposed an integrated package of revisions to
its regulations governing interstate natural gas pipelines. "Short term" has
been defined in the NOPR as all transactions of less than one year. Under the
proposed approach, cost-based regulation would be eliminated for short-term
transportation and replaced by regulatory policies intended to maximize
competition in the short-term transportation market, mitigate the ability of
companies to exercise residual monopoly power and provide opportunities for
greater flexibility providing pipeline services. The proposed changes include
initiatives to revise pipeline scheduling procedures, receipt and delivery
point policies and penalty policies, and require pipelines to auction
short-term capacity. Other proposed changes would improve the FERC's reporting
requirements, permit pipelines to negotiate rates and terms of services, and
revise certain rate and certificate policies that affect competition.
In conjunction with the NOPR, the FERC also issued a Notice of Inquiry
(NOI) on its pricing policies in the existing long-term market and pricing
policies for new capacity. The FERC seeks comments on whether its policies are
biased toward either short-term or long-term service, provide accurate price
signals and the right incentives for pipelines to provide optimal
transportation services and construct facilities that meet future demand and do
not result in over building and excess capacity. Comments on the NOPR and NOI
are due in April 1999.
Because these notices are at a very early stage and ultimate resolution is
unknown, management cannot estimate the effects of these matters on future
consolidated results of operations or financial position.
RETAIL COMPETITION. The Company currently does not provide retail natural
gas service, but changes in regulation to allow retail competition could affect
the Company's natural gas transportation contracts with local distribution
companies. Natural gas retail deregulation is in the very early stages of
development and management cannot estimate the effects of this matter on future
consolidated results of operations or financial position.
ENVIRONMENTAL. The Company is subject to international, federal, state and
local regulations regarding air and water quality, hazardous and solid waste
disposal and other environmental matters.
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SUPERFUND SITES. Subsidiaries of the Company are considered by regulators
to be a potentially responsible party and may be subject to future liability at
six federal Superfund sites and one state Superfund site. While the cost of
remediation of the remaining sites may be substantial, the Company will share
in any liability associated with remediation of contamination at such sites
with other potentially responsible parties. Management believes that resolution
of these matters will not have a material adverse effect on consolidated
results of operations or financial position.
PCB (POLYCHLORINATED BIPHENYL) ASSESSMENT AND CLEAN-UP PROGRAMS. TETCO, a
wholly owned subsidiary of the Company, is currently conducting PCB assessment
and clean-up programs at certain of its compressor station sites under
conditions stipulated by a U.S. Consent Decree. The programs include on- and
off-site assessment, installation of on-site source control equipment and
groundwater monitoring wells and on- and off-site clean-up work. TETCO
completed the soil clean-up programs during 1998, subject to regulatory
approval. Groundwater monitoring activities will continue at several sites
beyond 1999.
In 1987, the Commonwealth of Kentucky instituted a suit in state court
against TETCO, alleging improper disposal of PCBs at TETCO's three compressor
station sites in Kentucky. This suit is still pending. In 1996, TETCO completed
clean-up of these sites under the U.S. Consent Decree.
The Company has also identified environmental contamination at certain
sites on the PEPL and Trunkline systems and has undertaken clean-up programs at
these sites. The contamination resulted from the past use of lubricants in
compressed air systems containing PCBs and the prior use of wastewater
collection facilities and other on-site disposal areas. Soil and sediment
testing, to date, has detected no significant off-site contamination. The
Company has communicated with the Environmental Protection Agency (EPA) and
appropriate state regulatory agencies on these matters. Under the terms of the
agreement with CMS Energy Corporation, the Company is obligated to complete the
PEPL and Trunkline clean-up programs at certain agreed-upon sites. These
clean-up programs are expected to continue until 2001.
At December 31, 1998 and 1997, remaining estimated clean-up costs on the
TETCO, PEPL and Trunkline systems were accrued and included in the Consolidated
Balance Sheets Other Current Liabilities and Environmental Clean-up
Liabilities. These cost estimates represent gross clean-up costs expected to be
incurred, have not been discounted or reduced by customer recoveries and
generally do not include fines, penalties or third-party claims. Costs expected
to be recovered from customers have been deferred and are included in the
Consolidated Balance Sheets as Environmental Clean-up Costs.
The federal and state clean-up programs are not expected to interrupt or
diminish the Company's ability to deliver natural gas to customers. Based on
the Company's experience to date and costs incurred for clean-up operations,
management believes the resolution of matters relating to the environmental
issues discussed above will not have a material adverse effect on consolidated
results of operations or financial position.
AIR QUALITY CONTROL. In December 1997, the United Nations held
negotiations in Kyoto, Japan to determine how to achieve worldwide
stabilization of greenhouse gas emissions, including carbon dioxide emissions
from fossil-fired generating facilities and methane from natural gas
operations. Further negotiations in November 1998 in Buenos Aires, Argentina,
resulted in a work plan to complete the operational details of the Kyoto
agreement by late 2000. The Company is taking steps to prepare for possible
action on greenhouse gas emissions and has completed a greenhouse gas emissions
inventory. Implications of greenhouse gas emissions are being integrated into
planning processes. Because this matter is in the early stages of discussion,
management cannot estimate the effects on future consolidated results of
operations or financial position.
LITIGATION AND CONTINGENCIES. For information concerning litigation and
other commitments and contingencies, see Note 11 to the Consolidated Financial
Statements, "Commitments and Contingencies."
YEAR 2000 READINESS PROGRAM. STATE OF READINESS. The Company initiated its
Year 2000 Readiness Program in 1996 and began a formal review of computer-based
systems and devices that are used in its business operations both domestically
and internationally. These systems and devices include customer information,
financial, materials management and personnel systems, as well as components of
natural gas production, gathering, processing and transmission, and electric
generation, distribution and transmission.
The Company is using a three-phase approach to address year 2000 issues:
1) inventory and preliminary assessment of computer systems, equipment and
devices; 2) detailed assessment and remediation planning; and 3) conversion,
testing and contingency planning. The Company is employing a combination of
systems repair and planned systems replacement activities to achieve year 2000
readiness for its business and process control systems, equipment and devices.
The Company has substantially completed the first two phases throughout its
business operations, and is in various stages of the third and final
23
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phase. The Company's goal is to have its critical systems, equipment and
devices year 2000 ready by mid-1999. Business acquisitions routinely involve an
analysis of year 2000 readiness and are incorporated into the overall program
as necessary.
The Company is actively evaluating and tracking year 2000 readiness of
external third parties with which it has a material relationship. Such third
parties include vendors, customers, U.S. governmental agencies, foreign
governments and agencies, and other business associates. While the year 2000
readiness of third parties cannot be controlled, the Company is attempting to
assess the readiness of third parties and any potential implications to its
operations. Alternate suppliers of critical products, goods and services are
being identified, where necessary.
COSTS. Management believes it is devoting the resources necessary to
achieve year 2000 readiness in a timely manner. Current estimates for total
costs of the program, including internal labor as well as incremental costs
such as consulting and contract costs, are approximately $8 million, of which
approximately $2 million had been incurred as of December 31, 1998. These costs
exclude replacement systems that, in addition to being year 2000 ready, provide
significantly enhanced capabilities which will benefit operations in future
periods.
RISKS. Management believes it has an effective program in place to manage
the risks associated with the year 2000 issue in a timely manner. Nevertheless,
since it is not possible to anticipate all future outcomes, especially when
third parties are involved, there could be circumstances in which the Company
would temporarily be unable to deliver energy or energy services to its
customers. Management believes that the most reasonably likely worst case
scenario would be small, localized interruptions of service, which likely would
be rapidly restored. In addition, there could be a temporary reduction in
energy needs of customers due to their own year 2000 problems. In the event
that such a scenario occurs, it is not expected to have a material adverse
impact on consolidated results of operations or financial position.
CONTINGENCY PLANS. Year 2000 contingency planning is currently underway to
assure continuity of business operations for all periods during which year 2000
impacts may occur. The Company is participating in multiple industry efforts to
assure effective year 2000 contingency plans, and intends to complete its own
year 2000 contingency plans by mid-1999. These plans address various year 2000
risk scenarios that cross departmental, business unit and industry lines as
well as specific risks from various internal and external sources, including
supplier readiness.
Based on assessments completed to date and compliance plans in process,
management believes that year 2000 issues, including the cost of making
critical systems, equipment and devices ready, will not have a material adverse
effect on the Company's business operation or consolidated results of
operations or financial position. Nevertheless, achieving year 2000 readiness
is subject to risks and uncertainties, including those described above. While
management believes the possibility is remote, if the Company's internal
systems, or the internal systems of external parties, fail to achieve year 2000
readiness in a timely manner, the Company's business, consolidated results of
operations or financial condition could be adversely affected.
NEW ACCOUNTING STANDARD. In September 1998, Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. The Company is required to adopt this standard
by January 1, 2000. SFAS No. 133 requires that all derivatives be recognized as
either assets or liabilities and measured at fair value, and it defines the
accounting for changes in the fair value of the derivatives depending on the
intended use of the derivative. The Company is currently reviewing the expected
impact of SFAS No. 133 on consolidated results of operations and financial
position.
SUBSEQUENT EVENT. On February 18, 1999, Duke Energy announced its intent
to make a concurrent cash tender offer in Chilean pesos in Chile and the United
States for 51% of the outstanding shares of Endesa-Chile. The estimated total
cash outlay is approximately $2.1 billion based on current exchange rates. The
offers will be contingent upon, among other things, certain Endesa-Chile
shareholder approvals. If all approvals are obtained, the transactions are
expected to be completed during the second quarter of 1999. Endesa-Chile
controls and operates 10,247 megawatts of generating capacity in Argentina,
Brazil, Chile, Colombia and Peru.
FORWARD-LOOKING STATEMENTS. From time to time, the Company may make
statements regarding its assumptions, projections, expectations, intentions or
beliefs about future events. These statements are intended as "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. The
Company cautions that assumptions, projections, expectations, intentions or
beliefs about future events may and often do vary from actual results and the
differences between assumptions, projections, expectations, intentions or
beliefs and actual results can be material. Accordingly, there can be no
assurance that actual results will not differ materially from those expressed
or implied by the forward-looking statements. Factors that could cause actual
achievements and events to differ materially from those expressed or implied in
such forward-looking statements include state and federal legislative and
regulatory initiatives that affect cost and investment recovery,
24
<PAGE>
have an impact on rate structures and affect the speed and degree to which
competition enters the electric and natural gas industries; industrial,
commercial and residential growth in the service territories of the Company and
its subsidiaries; the weather and other natural phenomena; the timing and
extent of changes in commodity prices and interest rates; changes in
environmental and other laws and regulations to which the Company and its
subsidiaries are subject or other external factors over which the Company has
no control; the results of financing efforts; growth in opportunities for the
Company's business units; achievement of year 2000 readiness; and the effect of
accounting policies issued periodically by accounting standard-setting bodies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition, Quantitative and Qualitative Disclosures About Market
Risk."
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
------------ --------- ---------
IN MILLIONS
<S> <C> <C> <C>
OPERATING REVENUES
Sales, trading and marketing of natural gas and petroleum products .... $7,854 $ 8,151 $5,848
Transportation and storage of natural gas ............................. 1,450 1,504 1,523
Trading and marketing of electricity .................................. 2,788 1,665 78
Other ................................................................. 967 595 367
------ ------- ------
Total operating revenues ........................................... 13,059 11,915 7,816
------ ------- ------
OPERATING EXPENSES
Natural gas and petroleum products purchased .......................... 7,497 7,705 5,414
Purchased power ....................................................... 2,602 1,658 78
Other operation and maintenance ....................................... 1,450 1,279 1,062
Depreciation and amortization ......................................... 385 342 309
Property and other taxes .............................................. 89 95 84
------ ------- ------
Total operating expenses ........................................... 12,023 11,079 6,947
------ ------- ------
OPERATING INCOME ....................................................... 1,036 836 869
OTHER INCOME AND EXPENSES .............................................. 101 37 20
------ ------- ------
EARNINGS BEFORE INTEREST AND TAXES ..................................... 1,137 873 889
INTEREST EXPENSE ....................................................... 237 214 232
MINORITY INTERESTS ..................................................... 71 22 6
------ ------- ------
EARNINGS BEFORE INCOME TAXES ........................................... 829 637 651
INCOME TAXES ........................................................... 310 257 252
------ ------- ------
INCOME BEFORE EXTRAORDINARY ITEM ....................................... 519 380 399
EXTRAORDINARY LOSS, NET OF TAX ......................................... (8) -- (17)
------ ------- ------
NET INCOME ............................................................. $ 511 $ 380 $ 382
====== ======= ======
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ------------- -----------
IN MILLIONS
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income .......................................................................... $ 511 $ 380 $ 382
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ..................................................... 397 349 326
Deferred income taxes ............................................................. 70 133 103
Transition cost (payments) recoveries, net ........................................ (28) (36) 91
(Increase) decrease in
Receivables ...................................................................... (101) (241) (648)
Inventory ........................................................................ (32) (11) 4
Other current assets ............................................................. (50) (6) 11
Increase (decrease) in
Accounts payable ................................................................. 56 198 582
Taxes accrued .................................................................... 40 33 15
Interest accrued ................................................................. 6 (9) (9)
Other current liabilities ........................................................ 101 (46) (7)
Other, net ........................................................................ (40) (46) 82
-------- --------- -------
Net cash provided by operating activities ....................................... 930 698 932
-------- --------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ................................................................ (1,573) (614) (788)
Investment expenditures ............................................................. (341) (673) (173)
Proceeds from sales and other, net .................................................. 115 109 96
-------- --------- -------
Net cash used in investing activities ........................................... (1,799) (1,178) (865)
-------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of
Long-term debt .................................................................... 590 947 327
Guaranteed preferred beneficial interests in subordinated notes
of Duke Capital Corporation ..................................................... 581 -- --
Common stock ...................................................................... -- 6 12
Payments for the redemption of long-term debt ....................................... (78) (200) (524)
Net change in notes payable and commercial paper .................................... (498) (221) 209
Capital contributions from parent ................................................... 200 -- 65
Dividends paid ...................................................................... -- (83) (142)
Other, net .......................................................................... 6 (26) (16)
-------- --------- -------
Net cash provided by (used in) financing activities ............................. 801 423 (69)
-------- --------- -------
Net decrease in cash and cash equivalents ............................................ (68) (57) (2)
Cash received from business acquisitions ............................................. 38 -- --
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ....................................... 94 151 153
-------- --------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............................................. $ 64 $ 94 $ 151
======== ========= =======
SUPPLEMENTAL DISCLOSURES
Cash paid for interest, net of amount capitalized ................................... $ 224 $ 222 $ 233
Cash paid for income taxes .......................................................... $ 192 $ 112 $ 86
</TABLE>
See Notes to Consolidated Financial Statements.
27
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
---------- ----------
IN MILLIONS
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................... $ 64 $ 94
Receivables ............................................. 1,767 1,621
Inventory ............................................... 214 183
Current portion of natural gas transition costs ......... 100 67
Unrealized gains on mark to market transactions ......... 1,457 551
Other ................................................... 218 140
------- -------
Total current assets .................................. 3,820 2,656
------- -------
INVESTMENTS AND OTHER ASSETS
Investments in affiliates ............................... 902 686
Pre-funded pension costs ................................ 340 302
Goodwill, net ........................................... 495 504
Notes receivable ........................................ 244 240
Unrealized gains on mark to market transactions ......... 396 66
Other ................................................... 169 89
------- -------
Total investments and other assets .................... 2,546 1,887
------- -------
PROPERTY, PLANT AND EQUIPMENT
Cost .................................................... 11,020 9,696
Less accumulated depreciation and amortization .......... 3,866 3,631
------- -------
Net property, plant and equipment ..................... 7,154 6,065
------- -------
REGULATORY ASSETS AND DEFERRED DEBITS
Debt expense ............................................ 58 66
Regulatory asset related to income taxes ................ 15 17
Natural gas transition costs ............................ 80 194
Environmental clean-up costs ............................ 87 104
Other ................................................... 96 108
------- -------
Total regulatory assets and deferred debits ........... 336 489
------- -------
TOTAL ASSETS ............................................ $13,856 $11,097
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
--------- ---------
IN MILLIONS
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable ............................................................... $ 1,406 $ 1,338
Notes payable and commercial paper ............................................. 29 138
Taxes accrued .................................................................. 159 119
Interest accrued ............................................................... 57 51
Current maturities of long-term debt ........................................... 258 23
Unrealized losses on mark to market transactions ............................... 1,387 538
Other .......................................................................... 466 390
------- -------
Total current liabilities .................................................... 3,762 2,597
------- -------
LONG-TERM DEBT .................................................................. 2,884 2,919
------- -------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes .......................................................... 1,460 1,364
Natural gas transition liabilities ............................................. 4 78
Environmental clean-up liabilities ............................................. 148 158
Unrealized losses on mark to market transactions ............................... 362 50
Other .......................................................................... 330 397
------- -------
Total deferred credits and other liabilities ................................. 2,304 2,047
------- -------
MINORITY INTERESTS .............................................................. 253 168
------- -------
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED NOTES OF DUKE CAPITAL
CORPORATION .................................................................... 580 --
------- -------
COMMON STOCKHOLDER'S EQUITY
Common stock, no par, 3,000 shares authorized; 1,010 shares outstanding ........ -- --
Paid-in capital ................................................................ 2,969 2,766
Retained earnings .............................................................. 1,104 600
------- -------
Total common stockholder's equity ............................................ 4,073 3,366
------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ..................................... $13,856 $11,097
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
----------- ---------- ----------
IN MILLIONS
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year ........................ $ -- $ -- $ --
----- ------ ------
BALANCE AT END OF YEAR ............................ -- -- --
----- ------ ------
PAID-IN CAPITAL
Balance at beginning of year ........................ 2,766 2,745 2,657
Dividend reinvestment and employee benefits ......... -- 7 23
Capital infusion from parent ........................ 200 10 65
Other capital stock transactions, net ............... 3 4 --
----- ------ ------
BALANCE AT END OF YEAR ............................ 2,969 2,766 2,745
----- ------ ------
RETAINED EARNINGS
Balance at beginning of year ........................ 600 316 76
Net income .......................................... 511 380 382
Dividends declared .................................. -- (83) (142)
Other capital stock transactions, net ............... (7) (13) --
----- ------ ------
BALANCE AT END OF YEAR ............................ 1,104 600 316
----- ------ ------
TOTAL COMMON STOCKHOLDER'S EQUITY .................... $4,073 $3,366 $3,061
===== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
30
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. Duke Capital Corporation (formally Church Street Capital
Corp.) (collectively with its subsidiaries, "the Company") is a wholly owned
subsidiary of Duke Energy Corporation (Duke Energy). The consolidated financial
statements include the accounts of all of the Company's majority-owned
subsidiaries after the elimination of significant intercompany transactions and
balances. Investments in other entities that are not controlled by the Company,
but where it has significant influence over operations, are accounted for using
the equity method.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's
knowledge of current and expected future events, actual results could differ
from those estimates.
CONSOLIDATED STATEMENTS OF CASH FLOWS. All liquid investments with
maturities at date of purchase of three months or less are considered cash
equivalents.
Cash flows from investing activities include investments in real estate
development projects. Proceeds from the sale of residential real estate
development projects are included in cash flows from operating activities.
Proceeds from the sale of commercial real estate development projects are
included in cash flows from investing activities.
INVENTORY. Inventory consists primarily of materials and supplies and gas
held for transmission, processing and sales commitments. Inventory is recorded
at the lower of cost or market, primarily using the average cost method.
COMMODITY DERIVATIVES. The Company, primarily through its subsidiaries,
manages its exposure to risk from existing contractual commitments and provides
risk management services to its customers and suppliers through forward
contracts, futures, over-the-counter swap agreements and options.
Commodity derivatives and certain forward contracts utilized for trading
purposes are accounted for using the mark-to-market method. Under this
methodology, these instruments are adjusted to market value, and the gains and
losses are recognized in current period income and are included in the
Consolidated Statements of Income as Natural Gas and Petroleum Products
Purchased or Purchased Power. Unrealized gains and losses are recorded in the
Consolidated Balance Sheets as Unrealized Gains or Losses on Mark to Market
Transactions.
Futures, over-the-counter swap agreements and options are also utilized
for non-trading purposes to hedge the impact of market fluctuations in the
price and transportation costs of natural gas, electricity and other
energy-related products. In order to qualify as a hedge, the price movements in
the commodity derivatives must be highly correlated with the underlying hedged
commodity. Under the deferral method of accounting, gains and losses related to
commodity derivatives which qualify as hedges of commodity commitments are
recognized in income when the underlying hedged physical transaction closes and
are included in the Consolidated Statements of Income as Natural Gas and
Petroleum Products Purchased or Purchased Power. Deferred gains and losses
related to such instruments are reported in the Consolidated Balance Sheets as
Current Assets or Liabilities until recognized in income. If the commodity
derivative is no longer sufficiently correlated to the underlying commodity, or
if the underlying commodity transaction closes earlier than anticipated, the
deferred gains or losses are recognized in income.
DERIVATIVE FINANCIAL INSTRUMENTS. The Company utilizes interest rate lock
agreements to hedge interest rate risk associated with new debt issuances.
Under the deferral method of accounting, gains or losses on such agreements,
when settled, are deferred in the Consolidated Balance Sheets as Long-term Debt
and are amortized in the Consolidated Statements of Income as an adjustment to
interest expense.
The Company enters into foreign currency swap agreements to manage foreign
currency risks associated with energy contracts denominated in foreign
currencies. These agreements are accounted for under the mark-to-market method.
See previous discussion of the mark-to-market method in the Commodity
Derivatives section.
31
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
GOODWILL AMORTIZATION. Goodwill related to the purchases of Duke/Louis
Dreyfus, L.L.C. (D/LD); Texas Eastern Corporation (TEC); and other natural gas
gathering, transmission and processing facilities and engineering consulting
businesses is amortized on a straight-line basis over 10 years, 40 years and 15
years, respectively. See Note 2 for a description of the D/LD acquisition.
Goodwill recorded as of December 31, 1998 and 1997 related to the 1989 TEC
acquisition was $245 million. Accumulated amortization of goodwill at December
31, 1998 and 1997 was $166 million and $124 million, respectively.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
original cost. The Company capitalizes all construction-related direct labor
and material costs, as well as indirect construction costs. Indirect costs
include general engineering, taxes and the cost of money. The cost of renewals
and betterments that extend the useful life of property, plant and equipment is
also capitalized. The cost of repairs and replacements is charged to expense as
incurred. Depreciation is generally computed using the straight-line method.
The composite weighted-average depreciation rates were 3.5%, 3.5% and 3.4% for
1998, 1997 and 1996, respectively.
When property, plant and equipment maintained by the Company's regulated
operations are retired, the original cost plus the cost of retirement, less
salvage, is charged to accumulated depreciation and amortization. When entire
regulated operating units are sold or non-regulated properties are retired or
sold, the property and related accumulated depreciation and amortization
accounts are reduced, and any gain or loss is recorded in income, unless
otherwise required by the Federal Energy Regulatory Commission (FERC).
IMPAIRMENT OF LONG-LIVED ASSETS. The recoverability of long-lived assets
and intangible assets are reviewed whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Such
evaluation is based on various analyses, including undiscounted cash flow
projections.
UNAMORTIZED DEBT PREMIUM, DISCOUNT AND EXPENSE. Premiums, discounts and
expenses incurred in connection with the issuance of presently outstanding
long-term debt are amortized over the terms of the respective issues. Any call
premiums or unamortized expenses associated with refinancing higher-cost debt
obligations used to finance regulated assets and operations are amortized
consistent with regulatory treatment of those items.
ENVIRONMENTAL EXPENDITURES. Environmental expenditures that relate to an
existing condition caused by past operations and do not contribute to current
or future revenue generation are expensed. Environmental expenditures relating
to current or future revenues are expensed or capitalized as appropriate.
Liabilities are recorded when environmental assessments and/or clean-ups are
probable and the costs can be reasonably estimated. Certain of these
environmental assessments and clean-up costs are expected to be recovered from
Natural Gas Transmission customers and have, therefore, been deferred and are
included in the Consolidated Balance Sheets as Environmental Clean-up Costs.
COST-BASED REGULATION. The Company's regulated operations are subject to
the provisions of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." Accordingly,
certain assets and liabilities that result from the regulated ratemaking
process are recorded that would not be recorded under generally accepted
accounting principles for non-regulated entities. These regulatory assets and
liabilities are classified in the Consolidated Balance Sheets as Regulatory
Assets and Deferred Debits and Deferred Credits and Other Liabilities,
respectively. The applicability of SFAS No. 71 is routinely evaluated, and
factors such as the impact of competition and the necessity to discount cost
based rates charged to customers are considered. Increasing competition might
require companies to reduce their asset balances to reflect a market basis less
than cost and to write off their associated regulatory assets. Management
cannot predict the potential impact, if any, of increasing competition on
future financial position or results of operations. However, the Company
continues to position itself to effectively meet these challenges by
maintaining competitive prices.
REVENUES. Revenues on transportation and storage of natural gas are
recognized as service is provided. Revenues on sales of natural gas and
petroleum products are recognized in the period of delivery. When rate cases
are pending final approval, a portion of the revenues is subject to possible
refund. Reserves have been established where required for such cases.
32
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
The Company recognizes revenues from engineering and consulting services
provided through costs plus fee contracts based on the costs incurred during
the period plus a pro rata portion of the total fee earned. Revenues from
services provided through fixed price contracts are recognized using the
percentage-of-completion method, primarily based on contract costs to date
compared with the total estimated contract costs.
The Company recognizes profits from sales of residential real estate
development projects at closing. Profit is recognized under the accrual method
using estimates of average gross profit per developed lot within the project
based on total estimated project costs. Gains on commercial real estate
development projects are recognized under the accrual method. Gains on land
trades are recognized based on the fair market value of the land received,
adjusted for any cash consideration, as compared to the cost of the land
traded.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC). AFUDC represents the
estimated debt and equity costs of capital funds necessary to finance the
construction of new regulated facilities. AFUDC is a non-cash item and is
recognized as a cost of Property, Plant and Equipment, with offsetting credits
to Other Income and Expenses and to Interest Expense. After construction is
completed, the Company is permitted to recover these costs, including a fair
return, through their inclusion in rate base and in the provision for
depreciation. Rates used for capitalization of AFUDC by the Company's regulated
operations are calculated in compliance with FERC rules.
INCOME TAXES. Duke Energy and its subsidiaries file a consolidated federal
income tax return. Federal income taxes have been provided by the Company on
the basis of its separate company income and deductions in accordance with
established practices of the consolidated group. Deferred income taxes have
been provided for temporary differences. Temporary differences occur when
events and transactions recognized for financial reporting result in taxable or
tax-deductible amounts in different periods. Investment tax credits have been
deferred and are being amortized over the estimated useful lives of the related
properties.
EXTRAORDINARY ITEMS. In January 1998, TEPPCO Partners, L.P. (TEPPCO), in
which a subsidiary of the Company has a 2% general partner interest and a 19.1%
limited partner interest, redeemed certain First Mortgage Notes. A non-cash
extraordinary loss of $8 million, net of income tax of $5 million, was recorded
related to costs of the early retirement of debt.
On October 1, 1996, Texas Eastern Transmission Corporation (TETCO), a
subsidiary of the Company, redeemed $150 million, 10% debentures and $100
million, 10 1/8% debentures due 2011. TETCO recorded a non-cash extraordinary
item of $17 million, net of income tax of $10 million, related to the
unamortized discount on this early retirement of debt.
RECLASSIFICATIONS. Certain amounts have been reclassified in the
Consolidated Financial Statements to conform to the current presentation.
NEW ACCOUNTING STANDARD. In September 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued. The Company is
required to adopt this standard by January 1, 2000. SFAS No. 133 requires that
all derivatives be recognized as either assets or liabilities and measured at
fair value, and it defines the accounting for changes in the fair value of the
derivatives depending on the intended use of the derivative. The Company is
currently reviewing the expected impact of SFAS No. 133 on consolidated results
of operations and financial position.
NOTE 2. BUSINESS COMBINATIONS
PANENERGY CORP (PANENERGY). On June 18, 1997, Duke Power Company (Duke
Power) changed its name to Duke Energy Corporation and completed a
stock-for-stock merger with PanEnergy. Subsequently, the common stock of
PanEnergy was contributed by Duke Energy to the Company. The combination of the
Company and PanEnergy was accounted for similar to a pooling of interests;
therefore, the Consolidated Financial Statements and other financial
information included in this Annual Report for periods prior to the combination
include the combined historical financial results of the Company and PanEnergy.
33
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2. BUSINESS COMBINATIONS -- CONTINUED
Operating revenues and net income previously reported by the separate
companies and the combined amounts presented in the accompanying Consolidated
Statements of Income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------
DUKE CAPITAL PANENERGY ADJUSTMENTS COMBINED
-------------- ----------- ------------- ---------
IN MILLIONS
<S> <C> <C> <C> <C>
Operating revenues ................... $272 $7,505 $39 $7,816
Income before extraordinary item ..... $ 38 $ 361 -- $ 399
Net income ........................... $ 38 $ 344 -- $ 382
</TABLE>
The adjustment to operating revenues is a reclassification of PanEnergy's
equity in earnings of unconsolidated affiliates from other income to revenues
to be consistent with the Company's financial statement presentation.
DUKE/LOUIS DREYFUS, L.L.C. On June 17, 1997, the Company acquired the
remaining 50% ownership interest in D/LD from affiliates of Louis Dreyfus Corp.
for $247 million. D/LD markets electric power, natural gas and energy-related
services to utilities, municipalities and other large energy users in North
America. The acquisition was accounted for by the purchase method, and the
assets and liabilities and results of operations of D/LD have been consolidated
in the Company's financial statements since the date of purchase. The purchase
price substantially represents goodwill.
DUKE/UAE L.L.C. During December 1997, a wholly owned subsidiary of the
Company formed a joint venture with UAE Ref-Fuel L.L.C. (UAE), a wholly owned
subsidiary of United American Energy Corp. The Company owns a 65% interest in
the joint venture, with UAE owning a 35% minority interest. The joint venture
acquired a 50% ownership interest in American Ref-Fuel Company, a
waste-to-energy firm with operations primarily in New York and New Jersey.
Thus, the Company has an indirect 32.5% ownership interest in American Ref-Fuel
Company and provided $237 million of investment and financing to the venture.
DUKE ENERGY TRADING AND MARKETING, L.L.C. On August 1, 1996, a wholly
owned subsidiary of the Company formed a natural gas and power marketing joint
venture with Mobil Corporation affiliates. The marketing company conducts
business as Duke Energy Trading and Marketing, L.L.C. in the United States and
as Duke Energy Marketing L.P. in Canada. The Company operates the joint venture
and owns a 60% interest, with Mobil Corporation owning a 40% minority interest.
NOTE 3. BUSINESS SEGMENTS
The Company is an integrated energy and energy services provider with the
ability to offer physical delivery and management of both electricity and
natural gas throughout the United States and abroad. The Company provides these
and other services through six business segments:
o Natural Gas Transmission
o Field Services
o Trading and Marketing
o Global Asset Development
o Other Energy Services
o Real Estate Operations
These segments were defined as a result of the Company adopting SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
Natural Gas Transmission, through its Northeast Pipelines, provides
interstate transportation and storage of natural gas for customers primarily in
the Mid-Atlantic and New England states. Until the expected sale of the Midwest
Pipelines in early 1999, Natural Gas Transmission also provides interstate
transportation and storage services in the midwest states. See further
discussion of the proposed sale of the Midwest Pipelines in Note 11 to the
Consolidated Financial Statements. The interstate natural gas transmission and
storage operations are also subject to the rules and regulations of the FERC.
34
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 3. BUSINESS SEGMENTS -- CONTINUED
Field Services gathers, processes, transports and markets natural gas and
produces and markets NGLs. Field Services operates gathering systems in ten
states that serve major gas-producing regions in the Rocky Mountain, Permian
Basin, Mid-Continent and Gulf Coast areas.
Trading and Marketing markets natural gas, electricity and other
energy-related products across North America. Duke Energy owns a 60% interest
in Trading and Marketing's operations, with Mobil Corporation owning a 40%
minority interest.
Global Asset Development develops, owns and operates energy-related
facilities worldwide. Global Asset Development conducts its operations
primarily through Duke Energy Power Services, LLC (Duke Energy Power Services)
and Duke Energy International, LLC (Duke Energy International).
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through Duke Engineering &
Services, Inc., Duke/Fluor Daniel and DukeSolutions, Inc.
Real Estate Operations conducts its business through Crescent Resources,
Inc., which develops commercial and residential real estate projects and
manages forest holdings in the southeastern United States.
35
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 3. BUSINESS SEGMENTS -- CONTINUED
BUSINESS SEGMENT DATA
<TABLE>
<CAPTION>
DEPRECIATION CAPITAL AND
UNAFFILIATED INTERSEGMENT TOTAL AND INVESTMENT SEGMENT
REVENUES REVENUES REVENUES EBIT AMORTIZATION EXPENDITURES ASSETS
-------------- -------------- ----------- --------- -------------- -------------- ----------
IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Natural Gas Transmission ........ $ 1,426 $ 102 $ 1,528 $ 702 $215 $ 290 $ 4,996
Field Services .................. 2,094 545 2,639 76 80 304 1,893
Trading and Marketing ........... 8,614 171 8,785 122 11 8 3,233
Global Asset Development ........ 237 82 319 80 31 1,027 2,061
Other Energy Services ........... 521 -- 521 10 12 41 376
Real Estate Operations .......... 181 -- 181 142 6 217 724
Other Operations ................ (14) 26 12 5 30 27 759
Eliminations .................... -- (926) (926) -- -- -- (186)
------- ------ ------- ------ ---- ------ -------
Total Consolidated ............. $13,059 $ -- $13,059 $1,137 $385 $1,914 $13,856
======= ====== ======= ====== ==== ====== =======
YEAR ENDED DECEMBER 31, 1997
Natural Gas Transmission ........ $ 1,468 $ 104 $ 1,572 $ 624 $229 $ 247 $ 5,059
Field Services .................. 2,481 574 3,055 157 71 157 1,855
Trading and Marketing ........... 7,411 78 7,489 44 7 18 1,857
Global Asset Development ........ 109 14 123 5 9 348 988
Other Energy Services ........... 361 15 376 18 6 47 223
Real Estate Operations .......... 124 -- 124 98 4 223 594
Other Operations ................ (39) -- (39) (73) 16 247 855
Eliminations .................... -- (785) (785) -- -- -- (334)
------- ------ ------- ------ ---- ------ -------
Total Consolidated ............. $11,915 $ -- $11,915 $ 873 $342 $1,287 $11,097
======= ====== ======= ====== ==== ====== =======
YEAR ENDED DECEMBER 31, 1996
Natural Gas Transmission ........ $ 1,470 $ 86 $ 1,556 $ 595 $228 $ 194 $ 5,186
Field Services .................. 2,216 421 2,637 152 59 531 1,709
Trading and Marketing ........... 3,773 41 3,814 58 4 7 1,404
Global Asset Development ........ 65 7 72 -- 7 35 522
Other Energy Services ........... 203 1 204 20 3 39 130
Real Estate Operations .......... 114 -- 114 88 4 115 446
Other Operations ................ (25) -- (25) (24) 4 40 655
Eliminations .................... -- (556) (556) -- -- -- (300)
------- ------ ------- ------ ---- ------ -------
Total Consolidated ............. $ 7,816 $ -- $ 7,816 $ 889 $309 $ 961 $ 9,752
======= ====== ======= ====== ==== ====== =======
</TABLE>
The Company's reportable segments are strategic business units that offer
different products and services and are each managed separately. Management
evaluates segment performance based on earnings before interest and taxes
(EBIT). Segment earnings before interest and taxes, presented in the
accompanying table, includes intersegment sales accounted for at prices
representative of unaffiliated party transactions. Segment assets are provided
as additional information in the accompanying table and are net of intercompany
advances, intercompany notes receivable and investments in subsidiaries.
Other Operations primarily includes communication services and certain
unallocated corporate costs.
NOTE 4. REGULATORY MATTERS
NATURAL GAS TRANSMISSION. The Company's interstate natural gas pipelines
primarily provide transportation and storage services pursuant to FERC Order
636. Order 636 allows pipelines to recover eligible costs resulting from
implementation of the order (transition costs). In 1994, the FERC approved
TETCO's settlement resolving regulatory issues related primarily to Order 636
transition costs and a number of other issues related to services prior to
Order 636. Under the 1994
36
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4. REGULATORY MATTERS -- CONTINUED
settlement, TETCO's liability for transition costs was estimated based on the
amount of producers' natural gas reserves and other factors. This settlement
provided for the recovery of certain of these transition costs from customers
through volumetric and reservation charges. In 1995, based upon producers'
discoveries of additional natural gas reserves, TETCO increased the estimated
liabilities for transition costs by $126 million, increased regulatory assets
by $86 million for amounts expected to be collected from customers and
recognized a $40 million charge to operating expenses ($26 million after tax).
In 1998, TETCO favorably resolved all remaining gas purchase contracts,
recognizing $39 million of income ($24 million after tax).
On August 29, 1998, the FERC approved a settlement filed by TETCO, which
accelerates recovery of natural gas transition costs and reduces depreciation
expense to more appropriately reflect the estimated useful lives of its
facilities, principally interstate natural gas pipelines. Prior to the
settlement, the Company reviewed the condition of its natural gas pipeline
facilities and current maintenance practices, and concluded that extension of
the useful lives was appropriate. These facilities have a book value of
approximately $1.8 billion, net of accumulated depreciation of $2.6 billion.
The new weighted average rate of depreciation for storage and transportation
plant is approximately 1.25%. Implementation of the settlement began October 1,
1998, and a rate moratorium will be in effect until 2004. The settlement
reduces customer rates as a result of the reduced depreciation expense offset
through 2001 by the accelerated recovery of natural gas transition costs. The
settlement is not expected to have a material effect on the net results of
operations or financial position of the Company.
On April 1, 1992 and November 1, 1992, Panhandle Eastern Pipe Line Company
(PEPL) placed into effect, subject to refund, general rate increases. On
February 26, 1997, the FERC approved PEPL's settlement agreement which provided
final resolution of refund matters and established prospective rates. The
agreement terminated other actions relating to these proceedings as well as
PEPL's restructuring of rates and transition cost recoveries related to FERC
Order 636. The settlement will not have a material impact on future operating
revenues or financial position of the Company. As a result of the resolution of
these and certain other proceedings, PEPL refunded $38 million to customers in
1997 and recorded earnings before interest and taxes of $33 million and $8
million in 1997 and 1996, respectively.
GLOBAL ASSET DEVELOPMENT. Two California electric generating plants, Moss
Landing and Oakland, sell electricity under the terms of Reliability Must Run
(RMR) Agreements with the California Independent System Operator (ISO), which
purchases electricity at FERC regulated rates. The Company has not received
final approval from the FERC with respect to the electric rates charged by the
two plants, and, therefore, the rates are subject to partial refund. Management
believes that the final resolution of this matter will not have a material
adverse effect on consolidated results of operations or financial position.
NOTE 5. INCOME TAXES
INCOME TAX EXPENSE
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1998 1997 1996
------ ------ -------
IN MILLIONS
<S> <C> <C> <C>
Current income taxes
Federal ................................ $200 $ 96 $123
State .................................. 40 28 26
---- ---- ----
Total current income taxes ............ 240 124 149
---- ---- ----
Deferred income taxes, net
Federal ................................ 59 122 90
State .................................. 11 11 13
---- ---- ----
Total deferred income taxes, net ...... 70 133 103
---- ---- ----
Total income tax expense ................ $310 $257 $252
==== ==== ====
</TABLE>
37
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5. INCOME TAXES -- CONTINUED
INCOME TAX EXPENSE RECONCILIATION TO STATUTORY RATE
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- ---------- ------------
IN MILLIONS
<S> <C> <C> <C>
Income tax, computed at the statutory rate of 35% .. $ 290 $ 223 $ 228
Adjustments resulting from:
State income tax, net of federal income tax effect 33 25 26
Other items, net .................................. (13) 9 (2)
------ ------- -----
Total income tax expense ........................... $ 310 $ 257 $ 252
====== ======= =====
Effective tax rate ................................. 37.3% 40.3% 38.7%
</TABLE>
NET DEFERRED INCOME TAX LIABILITY COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
----------- -----------
IN MILLIONS
<S> <C> <C>
Deferred credits and other liabilities ................... $ 108 $ 286
Alternative minimum tax credit carryforward (a) .......... 30 30
Other .................................................... 7 8
-------- --------
Total deferred income tax assets ........................ 145 324
Valuation allowance ...................................... (52) (47)
-------- --------
Net deferred income tax assets .......................... 93 277
-------- --------
Investments and other assets ............................. (109) (130)
Prefunded pension costs .................................. (103) (106)
Property, plant and equipment ............................ (1,025) (1,007)
Regulatory assets and deferred debits .................... (91) (135)
Natural gas transition costs ............................. (62) (68)
Other .................................................... (66) (99)
-------- --------
Total deferred income tax liabilities ................... (1,456) (1,545)
-------- --------
State deferred income tax, net of federal tax effect ..... (97) (96)
-------- --------
Net deferred income tax liability ........................ $ (1,460) $ (1,364)
======== ========
</TABLE>
---------
(a) The alternative minimum tax credit carryforward can be carried
forward indefinitely.
In 1990, PanEnergy established a provision for certain tax issues related
to the purchase of TEC, which resulted in an increase in goodwill and deferred
income tax liability. If tax benefits relating to the valuation allowance for
deferred income tax assets and other tax reserves are recognized subsequent to
December 31, 1998, approximately $29 million will be allocated as an adjustment
to goodwill.
NOTE 6. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
The Company, primarily through Trading and Marketing, manages its exposure
to risk from existing contractual commitments and provides risk management
services to its customers through forward contracts, futures, over-the-counter
swap agreements and options (collectively, "commodity instruments"). Energy
commodity forward contracts involve physical delivery of an energy commodity.
Energy commodity futures involve the buying or selling of natural gas,
electricity or other energy-related commodities at a fixed price.
Over-the-counter swap agreements require the Company to receive or make
payments based on the difference between a specified price and the actual price
of the underlying commodity. Energy commodity options held to mitigate price
risk provide the right, but not the requirement, to buy or sell energy-related
commodities at a fixed price.
38
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS -- CONTINUED
COMMODITY INSTRUMENTS -- TRADING. The Company engages in the trading of
commodity instruments, and therefore experiences net open positions. The
Company manages open positions with strict policies which limit its exposure to
market risk and require daily reporting to management of potential financial
exposure. These policies include statistical risk tolerance limits using
historical price movements to calculate a daily earnings at risk measurement.
The weighted-average life of the Company's commodity risk portfolio was
approximately 11 months at December 31, 1998. During 1998, 1997 and 1996, net
gains of $114 million, $34 million and $25 million, respectively, were
recognized from trading natural gas commodity derivatives. During 1998, net
gains of $14 million were recognized from trading electricity commodity
instruments. Net gains related to trading electricity commodity instruments
were not material during 1997 and 1996. As of December 31, 1998 and 1997, the
absolute notional contract quantity of natural gas commodity derivatives held
for trading purposes was 11,149 billion cubic feet (Bcf) and 5,408 Bcf,
respectively. As of December 31, 1998, the absolute notional contract quantity
of electricity commodity instruments held for trading purposes was 112,867
gigawatt hours (GWh). As of December 31, 1997, outstanding electricity
commodity instruments were not material. At December 31, 1998 and 1997, other
outstanding energy-related commodity derivatives held for trading purposes were
not material.
COMMODITY INSTRUMENTS -- TRADING
<TABLE>
<CAPTION>
1998 1997
---------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ------------- -------- ------------
IN MILLIONS
<S> <C> <C> <C> <C>
Fair value at December 31 ........... $1,853 $1,749 $617 $588
Average fair value for the year ..... 685 646 384 369
</TABLE>
COMMODITY DERIVATIVES -- NON-TRADING. At December 31, 1998 and 1997, the
Company held or issued several derivatives that reduce exposure to market
fluctuations relative to price and transportation costs of natural gas,
electricity and petroleum products. The Company's market exposure arises from
natural gas storage inventory balances and fixed-price purchase and sale
commitments that extend for periods of up to eight years. Futures, swaps and
options are used to manage and hedge price and location risk related to these
market exposures. Futures and swaps are also used to manage margins on
underlying fixed-price purchase or sale commitments for physical quantities of
natural gas, electricity and other energy-related commodities. Options are
utilized to manage margins and to limit overall price risk exposure. The gains,
losses and costs related to those commodity derivatives that qualify as a hedge
are not recognized until the underlying physical transaction closes. At
December 31, 1998, the Company had deferred net gains of $10 million related to
commodity derivative hedges. As of December 31, 1998, the absolute notional
contract quantity of commodity derivatives held for non-trading purposes was
218 Bcf of natural gas and 9,764 GWh of electricity. Commodity derivatives held
for non-trading purposes were not material at December 31, 1997.
FOREIGN CURRENCY DERIVATIVES. Trading and Marketing enters into foreign
currency swap agreements to manage foreign currency risks associated with
energy contracts denominated in foreign currencies. The agreements, with a
notional contract amount of approximately $120 million, begin in the year 2000
and extend to the year 2005. The weighted average fixed exchange rate for the
agreements is 1.472 Canadian dollars to U.S. dollars. The fair value of these
agreements was not material at December 31, 1998.
MARKET AND CREDIT RISK. New York Mercantile Exchange (Exchange) traded
futures and option contracts are guaranteed by the Exchange and have nominal
credit risk. On all other transactions previously described, the Company is
exposed to credit risk in the event of nonperformance by the counterparties.
For each counterparty, the Company analyzes the financial condition prior to
entering into an agreement, establishes credit limits and monitors the
appropriateness of these limits on an ongoing basis. The change in market value
of exchange-traded futures and options contracts requires daily cash settlement
in margin accounts with brokers. Swap contracts and most other over-the-counter
instruments are generally settled at the expiration of the contract term and
may be subject to margin requirements with the counterparty.
FINANCIAL INSTRUMENTS. In 1996, TETCO received $99 million from the
financing of the right to collect certain Order 636 natural gas transition
costs, with limited recourse. At December 31, 1998 and 1997, $17 million and
$53 million, respectively, remained outstanding related to the transition cost
recovery rights and were included in the Consolidated Balance
39
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS -- CONTINUED
Sheets as Other Current Liabilities and Deferred Credits and Other Liabilities.
Management believes the probability that the Company will be required to
perform under the recourse provisions is remote.
The fair value of financial instruments is summarized in the following
table. Judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates determined as of December
31, 1998 and 1997 are not necessarily indicative of the amounts the Company
could have realized in current market exchanges. The majority of the estimated
fair value amounts were obtained from independent parties.
FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
1998 1997
-------------------------- -------------------------
APPROXIMATE APPROXIMATE
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
------------ ------------- ------------ ------------
IN MILLIONS
<S> <C> <C> <C> <C>
Long-term debt (a) ............................................ $3,142 $3,341 $ 2,942 $ 3,079
Guaranteed preferred beneficial interests in subordinated notes
of the Company ............................................... 580 590 -- --
</TABLE>
- ---------
(a) Includes current maturities.
The fair value of cash and cash equivalents, notes receivable and notes
payable and commercial paper are not materially different from their carrying
amounts because of the short-term nature of these instruments or because the
stated rates approximate market rates.
Guarantees made to affiliates or recourse provisions from affiliates and
the sales agreement for Order 636 natural gas transition cost recovery have no
book value associated with them, and there are no fair values readily
determinable since quoted market prices are not available.
NOTE 7. INVESTMENT IN AFFILIATES
Investments in domestic and international affiliates which are not
controlled by the Company but where the Company has significant influence over
operations are accounted for by the equity method. These investments include
undistributed earnings of $5 million and $21 million in 1998 and 1997,
respectively. The Company's share of net income from these affiliates are
reflected in the Consolidated Statements of Income as Other Operating Revenues.
NATURAL GAS TRANSMISSION. Investments primarily include ownership
interests in natural gas pipeline joint ventures which transport gas from
Canada to the United States. Investments include a 37.5% ownership interest in
Maritimes & Northeast Pipeline and a 9.8% ownership interest in Alliance
Pipeline.
FIELD SERVICES. Investments primarily include a 37% interest in a
partnership which owns natural gas gathering systems in the Gulf of Mexico
(Dauphin Island Gathering Partners) and a 21.1% interest in TEPPCO.
GLOBAL ASSET DEVELOPMENT Global Asset Development has investments in
various natural gas and electric generation and transmission facilities
worldwide. Significant investments include a 32.5% indirect interest in
American Ref-Fuel Company, a 9.76% indirect interest in Hidroelectrica Piedra
del Aguila S.A., and a 25% indirect interest in National Methanol Company,
which owns and operates a methanol and MTBE (methyl tertiary butyl ether) plant
in Jubail, Saudi Arabia.
OTHER ENERGY SERVICES. Investments include the participation in various
construction and support activities for fossil-fueled generating plants.
REAL ESTATE OPERATIONS. Investments include various real estate
development projects.
OTHER OPERATIONS. Investments include a 20% interest in the BellSouth PCS
L.P. joint venture, which provides wireless personal communication services.
40
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7. INVESTMENT IN AFFILIATES -- CONTINUED
INVESTMENT IN AFFILIATES
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------------------- ----------------------------------
DOMESTIC INTERNATIONAL TOTAL DOMESTIC INTERNATIONAL TOTAL
---------- --------------- ------- ---------- --------------- -------
IN MILLIONS
<S> <C> <C> <C> <C> <C> <C>
Natural Gas Transmission ..... $104 $ 37 $141 $ 67 $ -- $ 67
Field Services ............... 303 -- 303 160 -- 160
Global Asset Development ..... 171 223 394 174 208 382
Other Energy Services ........ 19 23 42 16 10 26
Real Estate Operations ....... 5 -- 5 2 -- 2
Other Operations ............. 17 -- 17 36 13 49
---- ---- ---- ---- ---- ----
Total ........................ $619 $283 $902 $455 $231 $686
==== ==== ==== ==== ==== ====
<CAPTION>
DECEMBER 31, 1996
---------------------------------
DOMESTIC INTERNATIONAL TOTAL
---------- --------------- ------
IN MILLIONS
<S> <C> <C> <C>
Natural Gas Transmission ..... $ 46 $ -- $ 46
Field Services ............... 130 -- 130
Global Asset Development ..... 14 184 198
Other Energy Services ........ 50 1 51
Real Estate Operations ....... 5 -- 5
Other Operations ............. 60 13 73
---- ---- ----
Total ........................ $305 $198 $503
==== ==== ====
</TABLE>
EQUITY IN EARNINGS OF INVESTMENT
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------------- -----------------------------------
DOMESTIC INTERNATIONAL TOTAL DOMESTIC INTERNATIONAL TOTAL
---------- --------------- -------- ---------- --------------- --------
IN MILLIONS
<S> <C> <C> <C> <C> <C> <C>
Natural Gas Transmission ..... $ 14 $ 3 $ 17 $ 8 $-- $ 8
Field Services ............... 9 -- 9 19 -- 19
Global Asset Development ..... 50 18 68 8 21 29
Other Energy Services ........ 1 13 14 4 8 12
Real Estate Operations ....... -- -- -- -- -- --
Other Operations ............. (29) -- (29) (30) -- (30)
------ --- ------ ------ --- ------
Total ........................ $ 45 $34 $ 79 $ 9 $29 $ 38
====== === ====== ====== === ======
<CAPTION>
DECEMBER 31, 1996
-----------------------------------
DOMESTIC INTERNATIONAL TOTAL
---------- --------------- --------
IN MILLIONS
<S> <C> <C> <C>
Natural Gas Transmission ..... $ 5 $-- $ 5
Field Services ............... 12 -- 12
Global Asset Development ..... 6 19 25
Other Energy Services ........ 19 2 21
Real Estate Operations ....... -- -- --
Other Operations ............. (31) 1 (30)
------ --- ------
Total ........................ $ 11 $22 $ 33
====== === ======
</TABLE>
SUMMARIZED COMBINED FINANCIAL INFORMATION OF UNCONSOLIDATED SUBSIDIARIES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997 1996
-------- -------- ---------
IN MILLIONS
<S> <C> <C> <C>
BALANCE SHEET
Current Assets ................. $ 848 $ 642 $1,025
Noncurrent Assets .............. 7,340 5,868 5,661
Current Liabilities ............ 1,084 758 879
Noncurrent Liabilities ......... 3,884 3,257 3,462
------ ------ ------
Net Assets ................... $3,220 $2,495 $2,345
====== ====== ======
INCOME STATEMENT
Operating Revenues ............. $1,667 $ 905 $3,133
Operating Expenses ............. 1,166 703 2,494
Net Income ..................... 263 72 160
</TABLE>
The Company had outstanding notes receivable from certain affiliates of
$80 million and $87 million at December 31, 1998 and 1997, respectively.
41
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8. PROPERTY, PLANT AND EQUIPMENT
PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
--------- ---------
IN MILLIONS
<S> <C> <C>
Natural gas transmission ..................... $ 6,194 $6,094
Gathering and processing ..................... 1,409 1,315
Construction work in progress ................ 469 351
Other property and equipment ................. 2,948 1,936
------- ------
Total Property, Plant and Equipment ......... $11,020 $9,696
======= ======
</TABLE>
ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
IN MILLIONS
<S> <C> <C>
Natural gas transmission ................ $2,585 $2,459
Gathering and processing ................ 482 444
Other ................................... 799 728
------ ------
Total Accumulated Depreciation ......... $3,866 $3,631
====== ======
</TABLE>
On July, 1, 1998, a subsidiary of Duke Energy purchased three electric
generating stations in California for $501 million from Pacific Gas & Electric
Company. These stations have a combined capacity of 2,645 megawatts. Two of the
three plants, Moss Landing and Oakland, are subject to the terms of RMR
Agreements with the California ISO. The cost of these facilities is included
within "Other property and equipment" above.
42
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 9. DEBT AND CREDIT FACILITIES
LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
YEAR DUE 1998 1997
------------- --------- -----------
IN MILLIONS
<S> <C> <C> <C>
DUKE CAPITAL CORPORATION
Senior Notes:
6 1/4% ....................................................................... 2005 $ 250 $ --
6 3/4% ....................................................................... 2018 150 --
Commercial paper, 5.73% and 6.03% weighted-average rate at December 31, 1998
and 1997, respectively ....................................................... 500 800
Other debt ..................................................................... 24 --
PANENERGY
Bonds:
7 3/4% ....................................................................... 2022 328 328
8 5/8% Debentures ............................................................ 2025 100 100
Notes:
9.55% - 9.9%, maturing serially .............................................. 1998 - 2003 59 73
7% - 8 5/8% .................................................................. 1999 - 2006 450 450
TETCO
Notes:
8% - 10 3/8% ................................................................. 2000 - 2004 500 500
Medium term, Series A, 7.64 - 9.07% .......................................... 1999 - 2012 100 100
ALGONQUIN GAS TRANSMISSION COMPANY
9.13% Notes .................................................................... 2003 100 100
PANHANDLE EASTERN PIPE LINE COMPANY (PEPL)
7 7/8% Note .................................................................... 2004 100 100
7.2% - 7.95% Debentures ........................................................ 2023 - 2024 200 200
CRESCENT RESOURCES, INC (a)
Construction and mortgage loans, 5.21% - 7.10% ................................. 1998 - 2011 69 117
Revolving credit facilities, 5.98% and 6.30% weighted-average rate at
December 31, 1998 and 1997, respectively ..................................... 2001 100 77
GLOBAL ASSET DEVELOPMENT
5.2% - 18% Notes ............................................................... 1999 - 2004 111 --
OTHER DEBT OF SUBSIDIARIES ..................................................... 13 --
Unamortized debt discount and premium, net ..................................... (12) (3)
------ -----
Total long-term debt ........................................................... 3,142 2,942
Current maturities of long-term debt ........................................... (258) (23)
------ -----
Total long-term portion ........................................................ $2,884 $2,919
====== =====
</TABLE>
---------
(a) Substantial amounts of Crescent Resources' real estate development
projects, land and buildings were pledged as collateral.
The annual maturities of consolidated long-term debt at December 31, 1998
were $258 million, $208 million, $234 million, $127 million and $270 million
for 1999 through 2003, respectively. Such payments exclude $628 million of
long-term debt that matures after 2003 which have call options whereby the
Company has the option to repay the debt early. Based on the years in which the
Company may first exercise their redemption options, $328 million could
potentially be repaid in 2002, $200 million in 2003 and $100 million
thereafter.
43
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 9. DEBT AND CREDIT FACILITIES -- CONTINUED
CREDIT FACILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1998 1997
-------------------------- -------------------------
CREDIT CREDIT
FACILITIES OUTSTANDING FACILITIES OUTSTANDING
------------ ------------- ------------ ------------
IN MILLIONS
<S> <C> <C> <C> <C>
364-day facilities (a) ................. $ 600 $ -- $ 300 $--
Four-year revolving facilities ......... 125 100 125 77
Five-year revolving facilities (a) ..... 950 -- 950 --
------ ---- ------ ---
Total Consolidated ..................... $1,675 $100 $1,375 $77
====== ==== ====== ===
</TABLE>
---------
(a) Supported commercial paper facilities.
NOTES PAYABLE AND COMMERCIAL PAPER
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
--------- --------
IN MILLIONS
<S> <C> <C>
Credit facilities outstanding ............ $ 100 $ 77
Note payable ............................. 4 4
Commercial paper outstanding ............. 525 934
------ ------
629 1,015
Less portion classified as long-term
Credit facilities ....................... (100) (77)
Commercial paper ........................ (500) (800)
------ ------
Portion classified as short-term ......... $ 29 $ 138
====== ======
</TABLE>
The weighted average interest rate on outstanding short-term notes payable
and commercial paper at December 31, 1998 and 1997 was 5.73% and 6.03%,
respectively.
NOTE 10. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED NOTES OF
DUKE CAPITAL
The Company has formed business trusts for which it owns all the
respective common securities. The trusts issue and sell preferred securities
and invest the gross proceeds in assets of the trusts. Substantially all the
assets of each trust are junior subordinated notes issued by the Company.
TRUST PREFERRED SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
ISSUED RATE 1998 1997 JUNIOR SUBORDINATED NOTES
- ------------------------------------- -------- -------- ------ --------------------------
IN MILLIONS
<S> <C> <C> <C> <C>
1998 .............................. 7 3/8% $ 250 -- 7 3/8% Series A due 2038
1998 .............................. 7 3/8% 350 -- 7 3/8% Series B due 2038
Unamortized debt discount ......... (20) --
----- --
$ 580 --
===== ==
</TABLE>
These trust preferred securities represent preferred undivided beneficial
interests in the assets of the respective trusts. Payment of distributions on
these preferred securities is guaranteed by the Company, but only to the extent
the trusts have funds legally and immediately available to make such
distributions. Dividends of $18 million related to the trust preferred
securities have been included in the Consolidated Statements of Income as
Minority Interests for the year ended December 31, 1998.
44
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 11. COMMITMENTS AND CONTINGENCIES
FUTURE CONSTRUCTION COSTS. Projected 1999 capital and investment
expenditures for Natural Gas Transmission, including allowance for funds used
during construction, are approximately $400 million and do not include
projections related to the Midwest Pipelines which are expected to be sold in
early 1999. These projections include the completion of the Maritimes &
Northeast Pipeline project, which will deliver natural gas to markets in the
Canadian Maritimes provinces and the northeastern United States from a supply
basin offshore Nova Scotia. These projections also include other market
expansion projects and costs relating to existing assets.
The Company plans to continue to significantly grow several of its
business segments: Field Services, Global Asset Development, Trading and
Marketing and Other Energy Services. Expansion opportunities for Field Services
include the planned $1.35 billion acquisition of the natural gas gathering,
processing, fractionation and NGL pipeline business of Union Pacific Resources
along with its natural gas and NGL marketing activities. The transaction is
expected to close in the first half of 1999.
Expansion opportunities for Global Asset Development's international
division, Duke Energy International, include the $315 million purchase of power
generation and transmission assets in western Australia and New Zealand,
including an ownership interest in a pipeline in western Australia. This
acquisition also includes a development proposal for a cogeneration plant and a
portfolio of international and Australian-based projects. This transaction
closed on January 22, 1999.
Also, Duke Energy International recently purchased the rights to develop
and operate the 500-mile Eastern Gas Pipeline project in eastern Australia.
Construction of this $270 million pipeline project is scheduled to begin in
July 1999 and completion is expected by the middle of 2000.
Expansion opportunities for Global Asset Development's domestic division,
Duke Energy Power Services, include the continuation of greenfield projects,
such as the Bridgeport Energy project and the Maine Independence Station, a
520-megawatt combined cycle natural gas-fired merchant generation plant in
Maine which is scheduled to begin producing power in the summer of 2000. Other
expansion opportunities include the Hidalgo project, a 510-megawatt power plant
to be built in south Texas, which is targeted to begin producing power in
mid-2000. Other similar initiatives in 1999 for both Duke Energy International
and Duke Energy Power Services will likely require significant capital and
investment expenditures, which will be subject to periodic review and revision
and may vary significantly depending on the value-added opportunities
presented.
Projected 1999 capital and investment expenditures for Trading and
Marketing, Other Energy Services and Real Estate Operations are approximately
$30 million, $90 million and $300 million, respectively. All projected capital
and investment expenditures are subject to periodic review and revision and may
vary significantly depending on acquisition opportunities, market volatility,
economic trends and the value-added opportunities presented.
ENVIRONMENTAL. The Company is subject to international, federal, state and
local regulations regarding air and water quality, hazardous and solid waste
disposal and other environmental matters.
TETCO is currently conducting PCB (polychlorinated biphenyl) assessment
and clean-up programs at certain of its compressor station sites under
conditions stipulated by a U.S. Consent Decree. The programs include on- and
off-site assessment, installation of on-site source control equipment and
groundwater monitoring wells and on- and off-site clean-up work. TETCO
completed the soil clean-up programs during 1998, subject to regulatory
approval. Groundwater monitoring activities will continue at several sites
beyond 1999.
In 1987, the Commonwealth of Kentucky instituted a suit in state court
against TETCO, alleging improper disposal of PCBs at TETCO's three compressor
station sites in Kentucky. This suit is still pending. In 1996, TETCO completed
clean-up of these sites under the U.S. Consent Decree.
The Company has also identified environmental contamination at certain
sites on the PEPL and Trunkline Gas Company (Trunkline) systems and has
undertaken clean-up programs at these sites. The contamination resulted from
the past use of lubricants in compressed air systems containing PCBs and the
prior use of wastewater collection facilities and other on-site disposal areas.
Soil and sediment testing, to date, has detected no significant off-site
contamination. The Company has communicated with the Environmental Protection
Agency and appropriate state regulatory agencies on these matters.
45
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 11. COMMITMENTS AND CONTINGENCIES -- CONTINUED
Under the terms of the agreement with CMS Energy Corporation discussed in Other
Commitments and Contingencies below, the Company is obligated to complete the
PEPL and Trunkline clean-up programs at certain agreed-upon sites. These
clean-up programs are expected to continue until 2001.
At December 31, 1998 and 1997, remaining estimated clean-up costs on the
TETCO, PEPL and Trunkline systems have been accrued and are included in the
Consolidated Balance Sheets as Other Current Liabilities and Environmental
Clean-up Liabilities. These cost estimates represent gross clean-up costs
expected to be incurred, have not been discounted or reduced by customer
recoveries and generally do not include fines, penalties or third-party claims.
Costs to be recovered from customers are included in the Consolidated Balance
Sheets as of December 31, 1998 and 1997, as Environmental Clean-up Costs.
The federal and state clean-up programs are not expected to interrupt or
diminish the Company's ability to deliver natural gas to customers. Based on
experience to date and costs incurred for clean-up operations, management
believes the resolution of matters relating to the environmental issues
discussed above will not have a material adverse effect on consolidated results
of operations or financial position.
LITIGATION. On May 1, 1997, Citrus Trading Corporation (Citrus) and Enron
Capital and Trade Resources Corporation, as successor to Enron Gas Marketing
Corporation, filed suit in the District Court of Harris County, Texas, against
Duke Energy LNG Sales, Inc. (formerly PanEnergy LNG Sales, Inc. and Pan
National Gas Sales, Inc.), a subsidiary of the Company, alleging breach of a
gas purchase contract (the Contract) for regasified LNG entered into between
Citrus and Pan National Gas Sales, Inc. Plaintiffs alleged that Duke Energy LNG
Sales, Inc. failed to deliver LNG pursuant to the terms of the Contract. The
plaintiffs sought compensatory damages in unspecified amounts for losses
allegedly incurred as a result of the contract breach as well as a declaratory
judgment that Duke Energy LNG Sales, Inc.'s assertions of force majeure due to
the interruption in the supply of LNG to Duke Energy LNG Sales, Inc. did not
constitute force majeure under the Contract. A settlement was executed and the
case was dismissed in December 1998.
Under the terms of the agreement with CMS Energy Corporation discussed in
Other Commitments and Contingencies below, the Company is retaining certain
legal and tax liabilities, including the two matters specifically discussed
below.
On April 25, 1997, a group of affiliated plaintiffs that own and/or
operate various pipeline and marketing companies and partnerships primarily in
Kansas filed suit against PEPL, a subsidiary of the Company, in the U.S.
District Court for the Western District of Missouri. The plaintiffs allege that
PEPL has engaged in unlawful and anti-competitive conduct with regard to
requests for interconnects with the PEPL system for service to the Kansas City
area. Asserting that PEPL has violated the antitrust laws and tortiously
interfered with the plaintiffs' business expectancies, the plaintiffs seek
compensatory and punitive damages. Based on information currently available to
the Company, management believes that the resolution of this matter will not
have a material adverse effect on consolidated results of operations or
financial position.
On May 13, 1997, Anadarko Petroleum Corporation (Anadarko) filed suits
against PEPL and other affiliates, as defendants, both in the United States
District Court for the Southern District of Texas and state district court of
Harris County, Texas. Pursuing only the federal court claim, Anadarko claims
that it was effectively indemnified by the defendants against any
responsibility for refunds of Kansas ad valorem taxes which are due purchasers
of gas from Anadarko, retroactive to 1983. On October 20, 1998 and January 15,
1999, the FERC issued orders on ad valorem tax issues, finding that first
sellers of gas were primarily liable for refunds. The FERC also noted that
claims for indemnity or reimbursement among the parties would be better
addressed by the United States District Court for the Southern District of
Texas. The Company believes the resolution of this matter will not have a
material adverse effect on consolidated results of operations or financial
position.
The Company and its subsidiaries are also involved in other legal, tax and
regulatory proceedings before various courts, regulatory commissions and
governmental agencies regarding matters arising in the ordinary course of
business, some of which involve substantial amounts. Where appropriate, the
Company has made accruals in accordance with SFAS No. 5, "Accounting for
Contingencies," in order to provide for such matters. Management believes that
the final disposition of these proceedings will not have a material adverse
effect on consolidated results of operations or financial position.
46
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 11. COMMITMENTS AND CONTINGENCIES -- CONTINUED
OTHER COMMITMENTS AND CONTINGENCIES. In January 1998, the Company acquired
a 9.8% ownership in Alliance Pipeline. This pipeline is designed to transport
natural gas from western Canada to the Chicago-area market center for
distribution throughout North America. The pipeline is scheduled to begin
commercial operation in late 2000. In addition to buying an ownership interest
in the pipeline project, the Company has a contractual commitment for 67.25
million cubic feet per day of capacity on the line over 15 years for an
estimated total of $315 million.
In 1993, the U.S. Department of the Interior announced its intention to
seek additional royalties from gas producers as a result of payments received
by such producers in connection with past take-or-pay settlements, and buyouts
and buydowns of gas sales contracts with natural gas pipelines. The Company's
pipelines, with respect to certain producer contract settlements, may be
contractually required to reimburse or, in some instances, to indemnify
producers against such royalty claims. The potential liability of the producers
to the government and of the pipelines to the producers involves complex issues
of law and fact which are likely to take substantial time to resolve. If
required to reimburse or indemnify the producers, the Company's pipelines will
file with the FERC to recover a portion of these costs from pipeline customers.
Periodically, the Company may become involved in contractual disputes with
natural gas transmission customers involving potential or threatened abrogation
of contracts by the customers. If the customers are successful, the Company may
not receive the full value of anticipated benefits under the contracts.
In the normal course of business, certain of the Company's subsidiaries
and affiliates enter into various contracts for energy services which contain
certain schedule and performance requirements. Risk management techniques are
used to mitigate their exposure associated with such contracts. Certain
subsidiaries of the Company have guaranteed performance under some of these
contracts. In addition, as of December 31, 1998, the Company and certain
subsidiaries of the Company have guaranteed debt agreements of affiliates and
have issued surety bonds and letters of credit.
Management believes that these commitments and contingencies will not have
a material adverse effect on consolidated results of operations or financial
position.
The Company, through its wholly owned subsidiaries, PanEnergy and TEC,
entered into an agreement to sell PEPL, Trunkline and additional storage
related to those systems (collectively, the PEPL Companies), which
substantially comprise the Midwest Pipelines, along with Trunkline LNG Company
(Trunkline LNG), to CMS Energy Corporation (CMS Energy). The sales price of
$2.2 billion involves cash proceeds of $1.9 billion and the assumption of
existing PEPL debt of approximately $300 million. Management believes that the
retention of certain assets and liabilities, such as the Houston office
building, certain environmental, legal and tax liabilities, and substantially
all intercompany balances, will not have a material adverse effect on
consolidated results of operations or financial position. The sale will result
in an after-tax gain of approximately $700 million and is contingent upon
receipt of clearances under the Hart-Scott-Rodino Act. Closing is expected in
early 1999. Total assets of the PEPL Companies and Trunkline LNG were $1.2
billion at December 31, 1998.
COMBINED 1998 OPERATING RESULTS OF THE PEPL COMPANIES AND TRUNKLINE LNG (A)
<TABLE>
<CAPTION>
IN MILLIONS
------------
<S> <C>
Operating Revenues ............................ $482
Operating Expenses ............................ 278
Other Income, Net ............................. 10
----
Earnings Before Interest and Taxes .......... $214
====
</TABLE>
---------
(a) Excludes intercompany building rental revenue, allocated corporate
expenses, building depreciation and certain other costs to be
retained by the Company.
LEASES. The Company utilizes assets under operating leases in several
areas of operations. Consolidated rental expense amounted to $41 million, $42
million and $50 million in 1998, 1997 and 1996, respectively. Future minimum
rental payments under the Company's various operating leases for the years 1999
through 2003 are $43 million, $37 million, $28 million, $19 million and $12
million, respectively.
47
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 12. STOCK-BASED COMPENSATION
The Company participates in Duke Energy's 1998 Stock Incentive Plan, under
which stock options for up to fifteen million shares of common stock may be
granted to key employees. The exercise price of each option granted under the
plan equals the market price of Duke Energy's common stock on the date of
grant. Vesting periods range from one to five years with a maximum exercise
term of ten years.
Effective with the merger, each share of PanEnergy common stock,
outstanding immediately prior to the merger, was converted into the right to
receive 1.0444 shares of Duke Energy common stock. Each option to purchase
PanEnergy common stock, outstanding prior to the merger, was assumed by Duke
Energy and became exercisable upon the same terms as under the applicable
PanEnergy stock option plan and option agreement, except that these options
became options to purchase shares of Duke Energy common stock, appropriately
adjusted.
NOTE 13. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS. Duke Energy and its subsidiaries have maintained
multiple non-contributory defined benefit retirement plans covering most
employees with minimum service requirements. Certain employees of the Company
participate in either the PanEnergy plan or the Duke Energy plan.
Through December 31, 1998 the PanEnergy plan provided retirement benefits
(i) for eligible employees of certain subsidiaries that are generally based on
an employee's years of benefit accrual service and highest average eligible
earnings, and (ii) for eligible employees of certain other subsidiaries under a
cash balance formula. A cash balance plan participant accumulates a retirement
benefit based upon a percentage, which may vary with age and years of service,
of current eligible earnings and current interest credits. Effective January 1,
1999, the benefit formula under the plan, for all eligible employees, was
changed to a cash balance formula.
Other Company employees participate in the Duke Energy non-contributory
defined benefit retirement plan. Effective January 1, 1997, this plan was
amended to base a plan participant's benefit on a cash balance formula. Prior
to January 1, 1997, the Duke Energy retirement plan benefits were based on an
age-related formula, which took into account the participant's years of benefit
accrual service and highest average eligible earnings.
In connection with the expected 1999 sale of the Midwest Pipelines to CMS
Energy, benefit accruals under the PanEnergy plan were frozen on December 31,
1998 for all participants who, as a result of the sale, will become employees
of CMS Energy and its subsidiaries. Once the transfer of benefit obligation and
related assets of the affected participants to CMS Energy is completed, the
plan will be merged into the Duke Energy Plan.
The Company's policy and Duke Energy's policy is to fund amounts, as
necessary, on an actuarial basis to provide assets sufficient to meet benefits
to be paid to plan participants. On December 30, 1997 assets and related
liabilities of $236 million and $204 million, respectively, for certain
PanEnergy participants were transferred to the Duke Energy plan. As a result of
this transfer, no contributions to the Duke Energy plan were necessary in 1998
or 1997.
The fair market value of Duke Energy's plan assets was $2,922 million and
$2,725 million for December 31, 1998 and 1997, respectively. The projected
benefit obligation was $2,540 million and $2,372 million for December 31, 1998
and 1997, respectively. The amount of pre-funded pension cost allocated to the
Company as of December 31, 1998 and 1997 was $337 million and $303 million,
respectively.
ASSUMPTIONS USED FOR PENSION AND OTHER POSTRETIREMENT BENEFITS ACCOUNTING
(a)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
PERCENT
<S> <C> <C> <C>
Discount rate ..................................... 6.75 7.25 7.50
Salary increase ................................... 4.67 4.15 4.80
Expected long-term rate of return on plan assets .. 9.25 9.25 9.18
Assumed tax rate, where applicable ................ 39.60 39.60 39.60
</TABLE>
---------
(a) Reflects weighted averages across all plans.
48
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 13. EMPLOYEE BENEFIT PLANS -- CONTINUED
The Company's net periodic pension benefit, including amounts allocated by
Duke Energy, for the years ending December 31, 1998, 1997 and 1996 was $37
million, $19 million and $19 million, respectively. In 1998, a significant
amount of lump sum payouts was made from the plan resulting in a settlement
gain of $10 million.
Duke Energy and PanEnergy also sponsor employee savings plans, which cover
substantially all employees. The Company expensed plan contributions, including
amounts allocated by Duke Energy, of $21 million, $19 million and $14 million
in 1998, 1997 and 1996, respectively.
OTHER POSTRETIREMENT BENEFITS. Duke Energy and most of its subsidiaries
provide certain health care and life insurance benefits for retired employees
on a contributory and non-contributory basis. Employees become eligible for
these benefits if they have met certain age and service requirements at
retirement, as defined in the plans. Under plan amendments effective late 1998
and early 1999, health care benefits for future retirees were changed to limit
employer contributions and medical coverage.
Benefit costs are accrued over the active service period of employees to
the date of full eligibility for the benefits. The net unrecognized transition
obligation, resulting from the implementation of accrual accounting, is being
amortized over approximately 20 years. With respect to the entire plan, the
fair value of the plan assets was $305 million and $266 million at December 31,
1998 and 1997, respectively. The accumulated postretirement benefit obligation
was $625 million and $667 million at December 31, 1998 and 1997, respectively.
It is the Company's and Duke Energy's general policy to fund accrued
postretirement health care costs. Duke Energy funds postretirement benefits
through various mechanisms, including retired lives reserves, voluntary
employee's beneficiary association trusts and 401(h) funding.
The Company's net periodic postretirement benefit cost, including amounts
allocated by Duke Energy, for the years ended December 31, 1998, 1997 and 1996,
was $19 million, $17 million and $16 million, respectively.
For measurement purposes, a 5% weighted average rate of increase in the
per capita cost of covered health care benefits was assumed for 1998. The rate
was assumed to decrease gradually to 4.75% for 2005 and remain at that level
thereafter. Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plans.
DUKE ENERGY'S SENSITIVITY TO CHANGES IN ASSUMED HEALTH CARE COST TREND
RATES
<TABLE>
<CAPTION>
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
---------------- ---------------
IN MILLIONS
<S> <C> <C>
Effect on total of service and interest cost components .. $ 3 $ (2)
Effect on postretirement benefit obligation .............. $30 $ (28)
</TABLE>
NOTE 14. RELATED PARTY TRANSACTIONS
Certain balances due to or due from related parties included in the
Consolidated Balance Sheets at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------ -------
IN MILLIONS
<S> <C> <C>
Receivables .............. $ 6 $ 18
Accounts payable ......... 129 52
Taxes accrued ............ 73 40
</TABLE>
Operating revenues of $85 million, $18 million and $23 million related to
intercompany sales to Duke Energy are included in the Consolidated Statements
of Income for the years ended December 31, 1998, 1997 and 1996, respectively.
49
<PAGE>
DUKE CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15. SUBSEQUENT EVENT (UNAUDITED)
On February 18, 1999, Duke Energy announced its intent to make a
concurrent cash tender offer in Chilean pesos in Chile and the United States
for 51% of the outstanding shares of Endesa-Chile. The estimated total cash
outlay is approximately $2.1 billion based on current exchange rates. The
offers will be contingent upon, among other things, certain Endesa-Chile
shareholder approvals. If all approvals are obtained, the transactions are
expected to be completed during the second quarter of 1999. Endesa-Chile
controls and operates 10,247 megawatts of generating capacity in Argentina,
Brazil, Chile, Columbia and Peru.
NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL
--------------- ---------------- --------------- ---------------- ----------
IN MILLIONS
<S> <C> <C> <C> <C> <C>
1998
Operating revenues ............... $3,093 $2,895 $3,881 $3,190 $13,059
Operating income ................. 257 209 264 306 1,036
EBIT ............................. 303 219 280 335 1,137
Income before extraordinary item . 147 108 117 147 519
Net income ....................... 139 108 117 147 511
1997
Operating revenues ............... $2,747 $2,116 $3,544 $3,508 $11,915
Operating income ................. 298 146 175 217 836
EBIT ............................. 303 175 178 217 873
Net income ....................... 146 67 72 95 380
</TABLE>
50
<PAGE>
INDEPENDENT AUDITORS' REPORT
DUKE CAPITAL CORPORATION:
We have audited the accompanying consolidated balance sheets of Duke
Capital Corporation (formerly Church Street Capital Corporation) and
subsidiaries (the Company) as of December 31, 1998 and 1997, and the related
consolidated statements of income, common stockholder's equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1998 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated statements of
income, retained earnings, and cash flows of Church Street Capital Corporation
for the year ended December 31, 1996, prior to their restatement for the 1997
combination with PanEnergy Corp similar to a pooling of interests described in
Note 2 to the consolidated financial statements. The contribution of Church
Street Capital Corporation and subsidiaries to revenues and net income
represented 3% and 10% for 1996 of the respective restated totals. Separate
financial statements of PanEnergy Corp and subsidiaries included in the
restated consolidated statements of income, common stockholder's equity, and
cash flows for the year ended December 31, 1996, were audited and reported on
separately by other auditors. We also audited the combination of the
accompanying consolidated statements of income, common stockholder's equity,
and cash flows for the year ended December 31, 1996, after restatement for the
1997 combination with PanEnergy Corp similar to a pooling of interests; in our
opinion, such consolidated statements have been properly combined on the basis
described in Note 2 to the consolidated financial statements.
/s/ DELOITTE & TOUCHE LLP
Charlotte, North Carolina
February 12, 1999
51
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
PANENERGY CORP:
We have audited the consolidated statements of income, common
stockholders' equity, and cash flows of PanEnergy Corp and subsidiaries for the
year ended December 31, 1996 (not presented herein). These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of PanEnergy Corp and subsidiaries for the year ended December 31, 1996
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Houston, Texas
January 16, 1997
52
<PAGE>
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The financial statements of Duke Capital Corporation (the Company) are
prepared by management, which is responsible for their integrity and
objectivity. The statements are prepared in conformity with generally accepted
accounting principles appropriate in the circumstances to reflect in all
material respects the substance of events and transactions which should be
included. The other information in the annual report is consistent with the
financial statements. In preparing these statements, management makes informed
judgments and estimates of the expected effects of events and transactions that
are currently being reported.
The Company's system of internal accounting control is designed to provide
reasonable assurance that assets are safeguarded and transactions are executed
according to management's authorization. Internal accounting controls also
provide reasonable assurance that transactions are recorded properly, so that
financial statements can be prepared according to generally accepted accounting
principles. In addition, accounting controls provide reasonable assurance that
errors or irregularities which could be material to the financial statements
are prevented or are detected by employees within a timely period as they
perform their assigned functions. The Company's accounting controls are
continually reviewed for effectiveness. In addition, written policies,
standards and procedures, and a strong internal audit program augment the
Company's accounting controls.
/s/ JEFFREY L. BOYER
Jeffrey L. Boyer
Controller
53
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Consolidated Financial Statements and Supplemental Financial Data
included in Part II of this annual report are as follows:
Consolidated Financial Statements
Consolidated Statements of Income for the Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Common Stockholder's Equity for the Years
Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Independent Auditors Reports
Quarterly Financial Data (unaudited) (included in Note 16 to the
Consolidated Financial Statements)
All schedules are omitted because of the absence of the conditions under
which they are required or because the required information is included in the
financial statements or notes thereto.
(b) Reports on Form 8-K
A Current Report on Form 8-K filed on November 5, 1998 contained
disclosures under Item 5, Other Events, and Item 7, Financial Statements, Pro
Forma Financial Information and Exhibits.
A Current Report on Form 8-K filed on December 1, 1998 contained
disclosures under Item 5, Other Events, and Item 7, Financial Statements, Pro
Forma Financial Information and Exhibits.
(c) Exhibits
Exhibits filed herewith are designated by an asterisk (*). All exhibits
not so designated are incorporated by reference to a prior filing, as
indicated. Items constituting management contracts or compensatory plans or
arrangements are designated by a double asterisk (**).
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- --------------------------------------------------------------------------------------------------------
<S> <C>
3.1 Restated Certificate of Incorporation of registrant (filed with registrant's Form 10, as amended, File
No. 0-23977).
3.2 By-Laws of registrant (filed with registrant's Form 10, as amended, File No. 0-23977).
4.1 $950,000,000 Five-Year Credit Agreement dated as of August 25, 1997, among the registrant, the banks
listed therein and The Chase Manhattan Bank, as Administrative Agent (filed with Form 10-K of Duke
Energy Corporation for the year ended December 31, 1997, File No. 1-4928, as Exhibit 10-S).
4.2 $600,000,000 364-Day Credit Agreement dated as of August 24, 1998, among the registrant, the banks
listed therein and The Chase Manhattan Bank, as Administrative Agent (filed with Form 10-K of Duke
Energy Corporation for the year ended December 31, 1998, File No. 1-4928, as Exhibit 10-T).
10.1 Formation Agreement between PanEnergy Trading and Market Services, Inc. and Mobil Natural Gas, Inc.
dated May 29, 1996 (filed with Form 10-K of PanEnergy Corp for the year ended December 31, 1996, File
No. 1-8157, as Exhibit 2.02).
10.2 ** 1977 Non-Qualified Stock Option Plan of Panhandle Eastern Corporation, as amended through December 3,
1986 (and related Agreement) (filed with Form 10-K of Panhandle Eastern Corporation for the year ended
December 31, 1986, File No. 1-8157, as Exhibit 10(f)).
10.3 ** 1982 Key Employee Stock Option Plan of Panhandle Eastern Corporation, as amended through December
3, 1986 (and related Agreement) (filed with Form 10-K of Panhandle Eastern Corporation for the year
ended December 31, 1986, File No. 1-8157, as Exhibit 10(g)).
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.4 ** Employees Savings Plan of Panhandle Eastern Corporation and Participating Affiliates (filed with Form
10-K of Panhandle Eastern Corporation for the year ended December 31, 1990, File No. 1-8157, as Exhibit
10.12).
10.5** Panhandle Eastern Corporation 1994 Long Term Incentive Plan (filed with Form 10-K of Panhandle Eastern
Corporation for the year ended December 31, 1993, File No. 1-8157, as Exhibit 10.18).
10.6 ** Amendment to Panhandle Eastern Corporation 1994 Long Term Incentive Plan (filed with Form 10-Q of
PanEnergy Corp for the quarter ended June 30, 1996, File No. 1-8157, as Exhibit 10.40).
10.7 Stock Purchase Agreement between PanEnergy Corp, Texas Eastern Corporation and CMS Energy Corporation,
dated as of October 31, 1998 ( filed as Exhibit 10 to Form 8-K of Duke Energy Corporation, File No. 1-4928, filed
November 5, 1998).
10.8 Merger and Purchase Agreement among Union Pacific Resources Company, Union Pacific Fuels, Inc.,
Duke Energy Field Services, Inc. and DEFS Merger Sub Corp., dated as of November 20, 1998 (filed as
Exhibit 10 to Form 8-K of Duke Energy Corporation, File No. 1-4928, filed December 1, 1998).
12* Computation of Ratios of Earnings to Fixed Charges.
23(a)* Consent of Deloitte & Touche LLP.
23(b)* Consent of KPMG LLP.
27* Financial Data Schedule.
99 PanEnergy's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 1-8157),
previously filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934, as amended, is hereby incorporated by reference.
</TABLE>
UNDERTAKING
The registrant hereby undertakes, pursuant to Regulation S-K, Item 601(b),
paragraph (4)(iii), to furnish to the Securities and Exchange Commission upon
request all constituent instruments defining the rights of holders of long-term
debt of the registrant and its consolidated subsidiaries not filed herewith for
the reason that the total amount of securities authorized under any of such
instruments does not exceed 10% of the total consolidated assets of the
registrant and its consolidated subsidiaries.
55
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 19, 1999 DUKE CAPITAL CORPORATION
(Registrant)
By: /s/ Richard B. Priory
------------------------------------
Richard B. Priory
Chairman of the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
(i) Principal executive officer:
By: /s/ Richard B. Priory
-----------------------------------
Richard B. Priory
Chairman of the Board and President
(ii) Principal financial officer:
By: /s/ Richard J. Osborne
-----------------------------------
Richard J. Osborne
Vice President and Chief Financial Officer
(iii) Principal accounting officer:
By: /s/ Jeffrey L. Boyer
-----------------------------------
Jeffrey L. Boyer
Controller
(iv) A majority of the Directors:
By: /s/ Richard B. Priory
-----------------------------------
Richard B. Priory
By: /s/ Harvey J. Padewer
-----------------------------------
Harvey J. Padewar
By: /s/ Fred J. Fowler
-----------------------------------
Fred J. Fowler
Robert S. Lilien
Richard J. Osborne
Date: March 19, 1999
56
EXHIBIT NO. 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997(a) 1996(a) 1995(a) 1994(a)
----------- --------- --------- --------- --------
DOLLARS IN MILLIONS
<S> <C> <C> <C> <C> <C>
Earnings before income taxes .......... $ 829 $ 637 $ 651 $ 572 $ 448
Fixed charges ......................... 258 235 254 264 263
------- ----- ----- ----- -----
Total ................................. $ 1,087 $ 872 $ 905 $ 836 $ 711
======= ===== ===== ===== =====
Fixed charges:
Interest on debt ...................... $ 251 $ 224 $ 238 $ 253 $ 253
Interest on component rentals ......... 7 11 16 11 10
------- ----- ----- ----- -----
Fixed charges ......................... $ 258 $ 235 $ 254 $ 264 $ 263
======= ===== ===== ===== =====
Ratio of earnings to fixed charges 4.2 3.7 3.6 3.2 2.7
======= ===== ===== ===== =====
</TABLE>
- ---------
(a) Financial information reflects accounting for the 1997 combination of the
Company with PanEnergy Corp similar to a pooling of interests. As a
result, the financial information gives effect to the combination as if it
had occurred on January 1, 1994.
57
EXHIBIT NO. 23(A)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement
Nos. 333-71297, 333-71297-01, 333-71297-02 and 333-71297-03 of Duke Capital
Corporation on Form S-3 of our report dated February 12, 1999, appearing in
this Form 10-K of Duke Capital Corporation for the year ended December 31,
1998.
/s/ DELOITTE & TOUCHE LLP
Charlotte, North Carolina
March 19, 1999
58
EXHIBIT NO. 23(B)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement
Nos. 333-71297, 333-71297-01, 333-71297-02 and 333-71297-03 of Duke Capital
Corporation on Form S-3 of our report dated January 16, 1997, appearing in this
Form 10-K of Duke Capital Corporation for the year ended December 31, 1998.
/s/ KPMG LLP
Houston, Texas
March 19, 1999
59
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Duke Capital Corporation Annual Report on Form 10K for the
year ended December 31, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0001051116
<NAME> Duke Capital Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 64,000
<SECURITIES> 0
<RECEIVABLES> 1,767,000
<ALLOWANCES> 0
<INVENTORY> 214,000
<CURRENT-ASSETS> 3,820,000
<PP&E> 11,020,000
<DEPRECIATION> 3,866,000
<TOTAL-ASSETS> 13,856,000
<CURRENT-LIABILITIES> 3,762,000
<BONDS> 2,884,000
0
0
<COMMON> 0
<OTHER-SE> 4,073,000
<TOTAL-LIABILITY-AND-EQUITY> 13,856,000
<SALES> 9,816,000
<TOTAL-REVENUES> 11,915,000
<CGS> 9,363,000
<TOTAL-COSTS> 10,642,000
<OTHER-EXPENSES> 437,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 214,000
<INCOME-PRETAX> 873,000
<INCOME-TAX> 257,000
<INCOME-CONTINUING> 380,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 380,000
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Not meaningful since Duke Capital Corporation is a wholly-owned subsidiary.
</FN>
</TABLE>
